Japan: new Governor, new opportunities?FundCalibre’s Darius McDermott shares his analysis plus 5 fund picks to consider

by | Apr 3, 2023

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There’s a changing of the guard in Japan this month. On 9 April, Kazuo Ueda will succeed Haruhiko Kuroda as the new governor of the Bank of Japan.

Mr Kuroda’s term was marked by radical monetary stimulus policies designed to induce inflation in Japan and break the deflationary cycle. But what do we know about the new Governor? And what could his tenure mean for investments in Japan?

Darius McDermott, managing director of FundCalibre, gives his views:

Will policy change direction?

“Mr Ueda begins his tenure at an interesting time,” said Darius. “A number of managers I have spoken to recently, believe that the yield curve control and negative interest rate policies are unsustainable – indeed Mr Ueda has said himself that it “seems to be reaching its limit”.

“That said, inflation is not as high as it is in the West and wage increases are well under control, so there is no pressing reason to make changes immediately. He will be keen not to make the mistakes of the 2000s by raising interest rates too soon.”
What does this mean for Japanese equities?

“While there is a lot of uncertainty both at home and abroad, a lot is already reflected in the valuation of Japanese equities,” continued Darius. “The market is both cheap and under-owned.

“What’s more, Japanese companies are in reasonable shape. They continue to buy back stock and return capital to shareholders at record levels. Earnings growth may slow in 2023, but margins should be relatively resilient.

“The market has been unloved for some time and any pick-up in sentiment could in turn lead to a material allocation shift by foreign investors. It’s perhaps time to take another look.”
Funds to consider:

Pictet Japanese Equity Selection This is a high-conviction strategy which invests in large and medium-sized businesses for the long term. The manager uses a combination of market and fundamental company analysis to select Japanese companies that promote good environmental and governance practices and offer favourable growth prospects at a reasonable price.
  Comgest Growth Japan This is a concentrated portfolio of only 30-40 high quality long-term growth companies. Each holding has been bought with a three to five year outlook. The managers believe that Japan is full of under-researched companies with great capital discipline, barriers to entry and growth. Their mission is to find them.
  FSSA Japan Focus This fund pays no attention to the benchmark, instead following the team’s clear philosophy and process that has proven to be so successful in other parts of Asia. It invests predominantly in large and medium-sized Japanese companies, with a heavy emphasis on quality.
  T. Rowe Price Japanese Equity This fund invests in around 60-100 Japanese companies of all sizes, although with a notable overweight to smaller firms. The manager aims to find businesses he believes can deliver sustainable growth, before other investors recognise their potential. He will adapt his investing style as needed to suit changing market conditions.
  Baillie Gifford Japanese Income Growth This fund aims to benefit from the improving corporate governance in Japan, as more and more businesses move towards a progressive dividend-paying policy. The managers apply a well-tested growth investing philosophy, combined with a focus on companies with the best dividend growth opportunities.

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