Japan’s inflation comeback prompts investors to tear up old playbooks -November 20, 2023 at 04:00 pm EST
* Ageing population no longer main Japan investment story
* Global stockpickers positive on Japan banks, retailers
* Investors cautious on bonds
LONDON/TOKYO, Nov 21 (Reuters) – Global inflationary
forces are finally seeping into Japan’s economy after decades of
falling prices, forcing investors to radically rethink their
Japan bets as the Bank of Japan considers a major policy shift.
International investors, who have long favoured stocks
benefiting from Japan’s ageing population or a weakening yen,
are tearing up their playbooks to focus on expected higher
interest rates, more generous dividends and a revival in
consumer spending.
The policy switch has been slow in coming but could herald
an entirely new way of investing in Japan if a predicted
long-term inflation rate of 2% in 2024 really happens.
Japanese shoppers who no longer expect prices to keep
falling may make big purchases. If the BOJ pulls interest rates
above zero for the first time in years, banks’ lending margins
could rise.
Japanese stock markets have already rallied to around their
highest since 1990, with consumer and financial stocks
outperforming domestic indexes. On the downside, inflation
creates a bleak outlook for Japanese government bonds.
“Interest rate policy is undergoing a historic change,” said
Shigeka Koda, chief executive of the $500 million
Singapore-based hedge fund Four Seasons Asia Investment.
“Something new is in the offing.”
BANKS UPSTAGE CREMATORIA AND CAKE-MAKING ROBOTS
Japan’s ageing demographic has made a Japanese crematorium
company one of the top picks for foreign investors, with its
shares up almost 700% in five years.
Koda’s top positions have included the crematorium operator
– Kosaido Holdings – as well as Rheon Automatic
Machinery, which sells cake-making robots to help food
manufacturers deal with a shrinking workforce.
But in August, for the first time in the 17-year history of
his fund, Koda picked a Japanese bank, Kyushu Financial
, as his largest position, because he believes Japanese
interest rates will rise.
Steve Donzé, deputy head of investment at Pictet Asset
Management in Tokyo, said he had also been buying Japanese bank
stocks.
For Junichi Inoue, head of Japanese equities at Janus
Henderson, consumer businesses with the pricing power to
increase revenues and profits by passing higher energy and food
costs on to customers were the focus.
“I do like convenience stores,” he said. “Margins have
really been going up, earnings have been good – positively
surprising.”
NEW DYNAMIC?
Japanese wages, adjusted for inflation, fell in the 18
consecutive months to September. But big employers are expected
to agree bumper pay hikes in the spring.
“You really need to see services inflation come through in
order for inflation to be sticky, and that’s driven by wages,”
said, James Halse, portfolio manager at Platinum Asset
Management in Sydney.
Data out on Friday is expected to show core consumer prices
accelerated again in October, staying above target for a 19th
straight month.
Global fund managers are the most positive on Japanese
stocks since March 2018, a Bank of America survey published on
Nov. 14 showed. And Warren Buffett is buying.
Japan’s Topix index, one of the key indexes on the
Tokyo Stock Exchange, has jumped 26% this year, helped by
corporate governance reforms.
David Hogarty, senior portfolio manager at Dublin-based KBI
Global Investors, said he had turned positive on Japan partly
because higher inflation would pressure companies to boost
dividend payouts.
“Typically, if you increase your dividend in inflationary
times, people like that,” he said, noting Japan currently has
the highest dividend growth globally at about 20% year-on-year.
BOND PAIN
Japanese inflation means bond investors could suffer. Rising
inflation reduces the appeal of fixed interest-paying bonds.
The BOJ has also long supported the bond market by buying
government debt to cap yields and suppress domestic borrowing
costs. But investors are cautious about this so-called yield
curve control policy ending as the BOJ is forced to tighten
monetary policy.
Inflation “probably isn’t transitory” for Japan because it
had not been in the United States or Europe, said Jon Day,
global bond portfolio manager at Newton Investment Management.
“And of course the bond market isn’t fully priced for it.”
The five-year JGB yield is around 0.35%. Even a
long-term inflation rate of 1% in Japan would make that a
“terrible return,” Day said.
U.S. Treasuries are facing a third year of hefty price falls
after aggressive Federal Reserve tightening took rates to
5.25%-5.5%. At minus 0.1%, the BOJ is the only major central
bank with negative rates.
Grégoire Pesques, CIO for fixed income at Europe’s largest
fund manager Amundi, said he holds a short position on the
10-year JGB as he expects yields to rise from around 0.8%
currently, as bond prices fall.
Rising yields could finally lift a battered yen.
The yen, which surged to 133 per dollar in December 2022
when the BOJ hinted it would review yield-curve control, dropped
as low as 151.92 last week.
“The direction of travel is clear and away from
unsustainably easy (monetary) policy,” Pictet’s Donzé said,
forecasting “a stronger currency as we move into 2024.”
(Reporting by Naomi Rovnick in London and Kevin Buckland in
Tokyo; Editing by Dhara Ranasinghe and Jane Merriman)
