Increase in public spending to trigger Japanese economic expansion


Fund Commentary
18 May 2017


In the first half of April, the Japanese stock market was generally weak as geopolitical risks grew in the wake of North Korea’s ballistic missile launch. However, in the second half of the month, concerns over geopolitical risks related to North Korea and the French presidential election faded away. The market later rallied on expectations of progress on US policy formation, together with a positive reaction to Japan’s corporate earnings results.

The TOPIX closed the month at 1,531.8 (up 1.3% MoM) and the Nikkei 225 at 19,196.7 (up 1.5% MoM). Bullish capex plans in the BoJ’s Tankan (quarterly economic survey) announced on 3rd April were well received by the market, raising expectations of Japanese economic expansion. However, optimism on the outlook for the US economy was dampened by March data regarding US car sales and non-farm payrolls, raising concerns that the yen would appreciate against the US dollar. North Korea launched a missile on 5th April, and the US bombed Syria on the 7th April in the midst of the Trump-Xi summit when President Trump ordered retaliation for the Assad Regime’s use of chemical weapons. With this combination of bad economic data and political risks, the US dollar fell below 109 against the yen, the lowest in five months and the Nikkei 225 dropped to 18,335.6 on the 14th April, its lowest level this year. In the second half of the month, the market recovered with a rise in buying interest, especially in undervalued stocks that had suffered setbacks. Global markets adopted a risk-on stance in the absence of North Korean provocation on the 25th April, and given relief following the first round result in France’s presidential election on the 23rd April.

In terms of sector performance, 24 out of TSE 33 sectors gained. The best five performers were miscellaneous manufacturing, construction, real estate, retail and rubber products, while the worst five performers were oil, marine transport, mining, fishery & agriculture and securities.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 28 April 2017 rose 0.9% compared with that of 31 March, while the TOPIX went up 1.3% during the same period. The Fund put one new name (JXTG Holdings) into the portfolio with no stocks sold out.

The world economy is set for increased growth over the next couple of years. The IMF released its latest forecast on world economic growth in April, revising up growth for 2017 from 3.4% to 3.5%, the first upward revision in the past several quarters. Notably, they revised up Japan’s growth from 0.8% to 1.2%, although the Investment Adviser thinks the new number still has the potential to increase. Industrial production in March declined 2.1% MoM, resulting in a figure of +0.1% QoQ in 1Q, the fourth consecutive QoQ rise. The government estimated that industrial production in April would rise 8.9% MoM and decline 3.7% in May. The labour market continues to tighten with the job offers to applicants ratio rising to 1.45x, the highest level in the past 26 years. There is another encouraging data point that we should pay attention to; contract value for public works. This is a clear leading indicator for GDP public spending data with a one to two quarters time lag, and has shown a strong recovery trend recently. On a seasonally adjusted basis, the contract value for October 2016 was ¥12.1 trillion (-9.2% YoY), November was ¥13.5 tn (-4.7% YoY), December was ¥14.2 tn (+5.4% YoY), January 2017 was ¥14.7 tn (+6.8% YoY), February was ¥15.5 tn (+10.0% YoY) and March was ¥15.8 tn (+11.0% YoY). As this data suggests, the large scale of the economic stimulus package, which was legalized in October 2016, has started to contribute strongly to economic expansion, and we should expect very good GDP data over the coming few quarters which may change both business and consumer sentiment dramatically.

In the coming couple of months, there are many important political events such as the OPEC meeting, the G7 meeting, the US administration’s 2018 budget proposal, the FOMC meeting, the Basel Committee meeting and another growth strategy in Japan. We should see most of these events contributing to economic stability and expansion, and helping to encourage investors to shift from bonds to equities. The Investment Adviser believes the Japanese equity market should be one of the greatest beneficiaries of this shift.

The Fund is increasing its allocation to the machinery and IT service sectors with the conviction that capex will expand significantly as the labour shortage is getting serious and capacity constraints are emerging. Cyclical sectors such as steel and nonferrous metals together with energy are also targeted for higher exposure. The Fund retains a very positive stance towards banks and trading companies, while defensive sectors such as foods, pharmaceuticals and utilities are avoided.


The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 12/05/17 and are based on internal research and modelling.