Richard Aston, portfolio manager of the CC Japan Income & Growth Trust plc, is clearly excited by the opportunities which he sees in a region of the world which has been somewhat overlooked by international investors for a while.
In this article for IFA Magazine he explains the reasons behind his positive sentiment.
The Japanese government announced its intentions for asset income growth back in August 2022 and we are now waiting for more detail on these much-anticipated plans to catalyse a rapid increase in nationwide investing, which could mark a positive development for income investors in the country.
To date, there’s been a significant long-term savings problem in Japan. Namely, of some 2,000 trillion yen worth of personal financial assets held across the country (as at the end of 2021), more than half is held in currency and deposits.
That’s by far the highest rate of any major developed country.
The knock-on effect is that income from these assets has barely increased at all throughout recent history due to ultra-low rates.
This means the Japanese economy is missing out on a valuable economic growth catalyst. It also means the nation’s rapidly ageing population could be at risk of running out of cash due to insufficient long-term asset building. After all, there’s a reason so much emphasis is placed on retirement planning in countries like the US and the UK.
The good news is that efforts to rectify this situation are on the way
The Japanese government is currently preparing to roll out the “Asset Income Doubling plan” it announced in its Basic Policy on Economic and Fiscal Management. And while details are sparse right now, we do know that Prime Minister Kishida is planning:
– A vast expansion of Japan’s NISA scheme, exempting small investments from tax;
– A redesign of iDeCo defined contribution individual pension plans;
– A drive to improve financial literacy so households can better build stable asset portfolios; and
– A strategy to enhance the asset management environment so more households are encouraged to select suitable financial assets.
We should have further details soon. However, the fundamental point is that the Japanese government is focusing on getting citizens to put more of their savings to work. That can only be good for income investors.
Right now, equities yield well in excess of bonds (helped, in no small part, by the impacts of yield-curve control policy on the country’s bond market). This means they are likely to be favoured by investors and their advisers as they search for an alternative to cash for their holdings.
Digging deeper, we believe that the stocks likely to receive the most attention as this develops are those that have worked to improve their corporate governance standards over the last decades. The ones that have focused the most on putting shareholders first by recognising their demands, increasing dividends and share buybacks, and unwinding cross-holdings.
This could be promising for income investors for two reasons.
Firstly, it means the stocks we tend to favour stand to be exposed to an upsurge of new funding they can put towards accelerating growth in a post-covid world (as well as continuing to reward investors through dividend payouts).
Secondly, it gives firms that have been slower to develop their corporate governance standards a powerful motivation to do so. Especially when put alongside other key drivers of corporate governance change like the restructuring of the Japanese stock market which places greater emphasis on “putting shareholders first”.
This stands to accelerate the rate at which the pool of attractive Japanese income stocks grows moving forward.
An opportunity for income
The net effect, of course, is that the Asset Income Doubling Plan could not only stand to benefit the Japanese economy, but also the nation’s standing as a global investment destination. As existing investors in an exciting area of the market that we think is primed to benefit most as the number of eyes on Japan increases, we are excited to see what Kishida has in store in the New Year.
Richard Aston is portfolio manager of the CC Japan Income & Growth Trust plc