The sizeable fiscal stimulus is beginning to take place


Fund Commentary
16 Aug 2016


At the beginning of the month, the risk-off market continued worldwide as nonperforming asset issues arose in Italy and the UK’s largest real estate fund suspended withdrawals. The Yen appreciated and the Japanese market declined in tandem with other markets. However, when the LDP won the Upper House election on the 10th, expectations for large scale economic stimulus measures heightened within Japan and the market rallied.

Strong US employment data released on the 8th, also brought comfort and the Yen depreciated which supported the Japanese market. The rally halted when Kuroda, the governor of the BoJ, appeared to show a negative view towards ‘helicopter money’ on the 21st. On the 29th, when the BoJ decided to increase the purchase of ETFs from 3 trillion yen to 6 trillion and not expand its negative interest rate policy, there was buying in financial stocks. However, the Yen strengthened which brought about declines in exporters.

Although the future conditions diffusion index (DI) in the Economy Watchers Survey showed a large decline after Brexit, manufacturing PMI data for July improved. Although the Yen showed a material rise against the US dollar and Euro and of course Sterling, June export volumes increased MoM and June’s number of visitors to Japan showed a YoY increase of 24% and MoM increase of 4.9%.

The TOPIX closed the month at 1,322.7 (up 6.2% MoM) and the Nikkei 225 at 16,569.3 (up 6.4% MoM). In terms of sector performance, 31 out of 33 sectors appreciated. The best five performers were insurance, securities, other products, transportation equipment and glass & ceramics. The worst five performers were oil, air transportation, fishery & agriculture, retail and utilities.

The Yen started the month at 103.2 against the US dollar and at one point appreciated to 100.5, but depreciated gradually and ended the month at 102.06. The yield on 10-year JGBs opened at -0.23 and closed at -0.195. At one point, the yield fell as low as -0.3 which is the historical low and the yield on 20-year JGBs went negative for the first time in history.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 29 July 2016 rose 5.8% compared with that of 30 June, while the TOPIX went up 6.2% during the same period. The Fund put one new name (Seibu Holdings) into the portfolio with one stock (Keihin) sold out.

Prime Minister Abe’s cabinet approved an economic stimulus package with JPY 28.1 trillion on 2nd August to combat deflation and shore up the economy with infrastructure investment and enhanced welfare services. The market’s verdict on the announcement was not positive at first as many economists suspected that the real impact of the package on the economy would not be as large as the headlines made it seem. However, the size of the package is the largest since Mr. Abe’s original fiscal stimulus in 2012. Of the JPY 28.1 trillion, “real money” or “fresh water” comes to JPY 7.5 trillion (1.5% of GDP). It is sizeable compared with recent years, and should contribute significantly to the economic recovery over the next 18 months. In contrast, when we look back at historical data, public spending actually showed negative growth with -2.6% YoY in FY2014 and -2.11% YoY in FY2015. This plan will be legalized during an extraordinary Diet in late September. The package combined with the BoJ’s additional easing should be very effective for currency stabilization. 

In the meantime, the Japanese economy shows some signs of recovery from the stagnant conditions caused by the Kumamoto earthquake and strong yen. Industrial production in June rose 1.9% MoM, beating the market consensus of +0.5% MoM. The government estimates that industrial production will increase 2.4% MoM in July, and further increase 2.3% MoM in August. The labour market is continuing to tighten with the jobless ratio in June declining to 3.1% from 3.2% in May and the job-offers-to-applicants ratio increasing to 1.37x, the highest since May 1990. Consumption continues to be sluggish with real household spending in June declining 2.2% YoY, although real household disposable income in June increased 1.9% YoY, which demonstrates how weak consumer sentiment is. The savings rate has risen from the 1-2% level to 7-8% in the past few years.

The economic stimulus package should lift economic activity directly by the expansion of public spending, and should also contribute to encouraging capex and consumer spending. The sizeable fiscal stimulus, which the economy needs for recovery and the market has been waiting for, is just now starting to take place.

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. A dramatic expansion of inbound tourists towards 2020 Tokyo Olympics should contribute to the real estate and construction sectors. The Fund retains a positive stance on 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 10/08/16 and are based on internal research and modelling.