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23 December 2016

Increased optimism from the Land of the Rising Sun

Japan will celebrate the Emperor’s Birthday on Friday 23rd December. Known as Tenno Tanjobi, this is a day on which people will honour the life and achievements of Emperor Akihito, who was born in 1933. It marks a day of celebrations for Japanese people, with markets in Tokyo closing for the day.

Investors are often divided over the merits of investing in the Japanese stock market. On Monday, it was announced that Japan's economy grew at a 1.3 per cent annual pace between July and September. This marked the third quarter of expansion in a row, but below most economists' forecasts.

In the early nineties, the country suffered a sharp decline in property prices and a severe banking crisis, resulting in large losses on the Japanese stock market, the Nikkei index. More recently, the country has been experiencing a decline in exports as a result of a slowdown in demand from China.

However, the current Prime Minister, Shinzo Abe, has pushed through aggressive economic reforms in a bid to kick-start growth and end the stagnation. Known as the ‘three-arrows’ approach, Abe has enacted fiscal stimulus, monetary easing and structural reforms. Most recently, the Bank of Japan surprised markets by introducing negative interest rates, which has certainly had the effect of hitting the banking sector hard.

Earlier this week, the Bank of Japan’s assessment of the country’s economy, issued on Monday 19th December, was upbeat. Keeping its key policy interest rate at -0.1 per cent, the Bank said the economy, investment and industrial production had shown signs of improving. However, the Bank also pointed out other factors hindering its growth, such as its rapidly ageing and shrinking population.

Besides corporate reforms, there are other positive factors influencing the Japanese economy. The country is largely immune from some of the current big macroeconomic concerns. For example, the Japanese stock market has no big energy companies and no capital expenditure dependent on oil.

There is a variety of ways in which investors can gain exposure to Japanese markets. For example, The Baillie Gifford Japan investment trust arrived in 1981, almost a decade after other pure Japanese investment trusts had been formed. The investment portfolio is actively managed and the manager, Sarah Whitley, is free to change her asset allocation at any time to allow the portfolio to reflect her views. Her investment policy is for the fund to be fully invested and is run on a relatively high conviction rate with total holdings typically between 40-70 stocks.

Discrete calendar performance for Baillie Gifford Japan Trust (%)

2011 -4.7

2012 +11.0

2013 +78.3

2014 +0.8

2015 +25.5

YTD (year to date) +19.3 as at 22nd December 2016

Legg Mason Japanese Equity Fund rates itself as being at the higher end of the risk scale and operates within the small/mid-cap equity sector. The fund has sizeable exposure to the healthcare and technology sectors. Fund manager Hideo Shiozumi has managed the fund since inception and has over 40 years’ experience in Japanese equities. As is perhaps to be expected given its bias towards small/mid-cap companies, the fund has gone through periods of intense volatility and, therefore, may not suit everyone.

Discrete calendar year performance for Legg Mason Japanese Equity Fund (%)

2011 +27.1

2012 +8.7

2013 +64.8

2014 -0.6

2015 +50.5

YTD +23.3 as at 22nd December 2016

Please note, our view does not constitute a recommendation to buy or sell the investments mentioned. Investments and income arising from them can fall in value and you may lose some or all of the amount you have invested. Past performance and forecasts are not reliable indicators of future results or performance. There is an extra risk of losing money when shares are bought in some smaller companies as there can be a big difference between the buying and selling price.

Increased optimism from the Land of the Rising Sun
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