Yet the Centrica Combined Common Investment Fund (CCCIF) is in the process of reducing its Japan exposure after an equity review in 2012, which concluded a better country balance was needed within its global equity portfolio. In 2012 the fund had UK at 20%, Japan at around 15% and the US at around 22%, meaning it had almost 60% of its portfolio in just three countries. To combat this concentration, it is currently selling down its passive exposure to UK and Japan.
CCCIF chief investment officer Chetan Ghosh explains: “About 40% outperformance relative to developed markets is about as good as it [Japan] has ever got and that is what we experienced in late 2012/early 2013. While it may outperform further it is certainly at the extremes already in terms of the outperformance it has realised. We are phasing the reduction over time.”
Russell Investments investment strategist Wouter Sturkenboom says companies’ profitability has been outweighed by the J-curve because imports have become more expensive, particularly following the Fukushima Daiichi nuclear disaster which led to Japan shutting down power plants and importing more energy, which in yen terms became more expensive.
“We are still waiting for exports to pick up to a large enough extent to outweigh the impact from high import prices,” says Sturkenboom. “Restarting the nuclear power plants would be a double plus because exports would hopefully pick up, energy imports would go down and the trade balance would pick up.”
Hit or miss?
While they have been mooted, many believe the BoJ’s own tapering plans are quite a long way off because it is likely to be driven by approximately the same driver as the Fed and the Bank of England, which is wage inflation. “As soon as that picks up that is when you will see pressure on BoJ to start tapering QE and the wage inflation story is really only at its starting point,” says Sturkenboom.
Bearing in mind the VAT hike and the fact inflation is still rising robustly the BoJ will consider tapering “at the earliest” in 2016, according to Vail.
“In the meantime, the question is will the BoJ do more?” he adds. “They might do something like credit facilities or extend the duration of purchases. But they have a gigantic bazooka and there is no need to fine tune a bazooka; it’s a bazooka for crying out loud.”
Sturkenboom meanwhile, believes it is too early to call whether Abenomics has been a success because the true test will come in the next two years when the stimulus starts to filter into the real economy. At this point, he says, it will become clear whether or not the inflation in Japan is ‘cost-push’ inflation imported from abroad because of the cheaper yen, or ‘demand-pull’ inflation created by excess consumer or business sector demand.
He questions: “Can it use the momentum from monetary stimulus into 2014/15 to boost the real economy, create more wage growth and boost investment from the corporate sector to create an embedded inflation story that will break away from the deflationary trends of the past and allow the Japanese economy to grow in line with the rest of the developed world?”
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