Q&A with Mitsuhiro Yuasa

In this interview by the Italian newspaper Patrimoni, Mitsuhiro Yuasa, portfolio manager of the Strategic Japan Opportunities Fund, discusses the strengths and weaknesses of the Japan economy, the role of inflation, forecasting trends and what sectors the Fund is currently focused on.

Fund Commentary
6 Jun 2019

In this interview by the Italian newspaper Patrimoni, Mitsuhiro Yuasa, portfolio manager of the Strategic Japan Opportunities Fund, discusses the strengths and weaknesses of the Japan economy, the role of inflation, forecasting trends and what sectors the Fund is currently focused on.

What are the strengths and weaknesses of the Japan economy?

Japan has a well educated population of one hundred twenty-five million, making it the tenth largest in the world, who are motivated to support economic growth and want to fulfil their responsibilities with regards to the current difficult geopolitical environment. Japan has officially decided to open its labour market to foreign workers, aiming to welcome three hundred fifty thousand people over the next five years, to mainly fulfil opportunities in the manufacturing, wholesale, retail, service, and construction industries. It is a small number in relative terms; however it will increase gradually in the near term and the additional workers will support Japan’s economic growth.  For context, there are currently only 1.5 million foreign workers out of a total labour force of approximately 66 million.  As such the target seems to only be a small trial but it is anticipated to provide significant support.  In the meantime however Japan has developed technologies or solutions to improve productivity without the need to increase the size of the labour market.

One example of this is Daifuku (6383), a warehouse management system which includes material handling hardware and software which is used by Amazon, the largest retail platformer in the world.  Amazon has improved its warehouse control system dramatically and actualized an unmanned picking, packing and delivering system by using Daifuku’s product.  Japanese companies have also lead the way over many years in terms of the development of Robotic Process Automation (RPA) systems in order to realise the most effective use of a company’s most precious resource, its people.

Japan as a tourist destination offers a lot, with many places to visit, such as beautiful suburban areas, Mt. Fuji and numerous hot springs and Japanese style hotels called “Ryokan”.  Currently Japan receives approximately thirty million foreign visitors each year; however the government plans to raise this, with the first target being forty million by 2020.

Prime Minister Abe and his cabinet have governed for the last seven years and he is eligible to run at the next election scheduled in September 2021.  Changes to the rules regarding the Presidency’s term in the LDP, the major party of the current Japanese political system to which Abe belongs, are required in order to extend Prime Minister Abe’s term beyond the 2021 elections. There has been no official communication in this regard; however, Yuasa believes that Prime Minister Abe and the politicians within his Party are planning to change the rules once again (as they did last year) in order to make it possible for him to run for further terms. The benefit for the country as a whole, is that to do so will ensure that a stable government is maintained, which is seen as one of the most important factors for Japan, especially under such difficult global conditions.

Finally, Japan has 16 trillion dollars of household wealth, 53% of which is currently in cash and deposits.  By comparison, in the United States of America, they have 82 trillion dollars of household wealth; however only 13% of this is held as cash and deposits.  As a result, Japan has more than 8 trillion dollars of cash reserves, very close to the 11 trillion dollars held by the US.  The key is how utilise such huge reserves held at Japanese banks.

What is the outlook for this economy?

The economic outlook in Japan is currently uncertain, due mainly to the US and China trade dispute in the short-term. Regardless of how geared a company is to the Chinese or US economy, the overall business conditions have been getting worse since 2018. The Japanese consumption trend has been weak since last summer and worsening further after the trade dispute in the fourth quarter of 2018.  As a result, the earnings of Japanese companies are weak, and forecasts for this year are also weak.  According to the FACTSET, EPS of TOPIX companies rose 1 – 2% for 2019 compared to the previous year.  It is estimated to rise seven percent year-on-year for 2020 at the latest survey.  Companies have stopped or slowed their production and CAPEX spending since last summer.  Future uncertainty is the biggest obstacle, not only for Japanese companies but all companies globally.  Japan has showed however, its ability to generate growth over the past years; as such the team believes that the economy will once again be able to delivery growth in the coming years.

The consumption tax rate is set to increase to 10%, from 8% currently in October 2019.  There is a rumour however that the government will postpone the consumption tax rate hike again or even consider reducing the tax rate.  It is difficult to stimulate domestic consumption even with the current tax rate since the fundamental reason for the weakness in consumption is people’s anxiety about the future.  Japan’s policy makers need to find alternative strategies to reduce people’s anxiety regarding their future within the context of the current global environment.  There is no magic solution, however reforms of the pension system or increasing the attractiveness of equity investments, bringing more than 50% of the household-wealth that is currently sitting at banks as cash reserves into the financial market to stimulate the domestic economy could be options for consideration.  Policymakers need to think about how to efficiently activate such sleeping assets.

What will be the role of inflation and of the Yen/USD exchange rate?

Inflation is at times used as a measure of the economic conditions, or a guide of a nation’s economic strengthen and directional momentum. Obviously, Japan has a low inflation rate, which means Japan is currently a low-key economy. To address this,  early on, the Abe cabinet’s term set a target 2% CPI, a level which is deemed to indicate a healthy economic environment.

The team expect the Yen/USD rate should weaken, based on a widening of the real-interest rate divergence between Japan and the US.  However, the Yen is a preferred asset for foreign investors, strengthening when investors see future uncertainty in the global economy.  In this context, the Yen/USD rate may strengthen in the short term, but is expected to return to current levels when global uncertainty is eased.

What do you forecast the trend of the Japanese index to be?

A company’s share price is determined as a result of bottom line growth and investor expectations regarding a company’s future. Expectations currently are for single digit bottom line growth for Japanese listed companies, as such the Japanese index which contains nearly 3,700 companies should rise 5 – 7% from current levels. The team anticipate that the index should rise in the future given that they believe Japanese companies can generate earnings and bottom line growth. It is worth noting that the Bank of Japan, the central bank of Japan, owns approximately 6.7% of the Japanese market.  It is therefore important to watch policy decisions at the BoJ in relation to how they will manage their holding in the future.  This is one of the reasons for the Japanese market’s relatively low PER, compared to those of other countries.  Japan needs to find a way to activate the nation’s wealth which sits in the bank as cash, to support future economic growth.

Do you think the tensions between Us and China will have an impact on your scenario?

Yes, the ongoing trade tensions has an enormous negative impact on the global economy. Underpinning this issue is the United States’ desire to have global currency or monetary hegemony. Therefore, it will not end until China compromises, which would mean the Renminbi would not be able to take a majority market share in terms of global trade.

What sectors are you focusing on?

The team are focusing, as always, on industries that will benefit and support Japan’s GDP growth. More specifically we seek to identify sectors which will support or find alternative ways to address Japan’s challenges, such as the labour shortage, aging society, low inflation, and opportunities around increased foreign visitors. Therefore, we focus on companies which are improving their productivity, providing tools and solutions to other companies in order to increase productivity.

Additionally, we like the technology sector, particularly those segments that are linked to 5G technologies, which have been under pressure since the US / China trade dispute started. Technology advancements happen suddenly, but there is always a fundamental change of mind set, for instance, unmanned driving system which can improve overall productivity however requires 5G high frequency transmission technology.

This article first appeared in the Italian newspaper Patrimoni in June 2019.

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