Work-style reform related bills continue to impact economy

At the beginning of September, the Japanese market continued to decline, decreasing for 7 consecutive days. Natural disasters, such as a typhoon and earthquake hit Japan, detrimentally impacting the economy, which is already being negatively affected by concerns over global trade frictions.

Fund Commentary
24 Oct 2018

At the beginning of September, the Japanese market continued to decline, decreasing for 7 consecutive days. Natural disasters, such as a typhoon and earthquake hit Japan, detrimentally impacting the economy, which is already being negatively affected by concerns over global trade frictions.

On 4th September, Kansai International Airport was closed due to the typhoon. Two days later, 2.95 million households were left without power following a 6.7 magnitude earthquake. These natural disasters negatively impacted tourist numbers and triggered the sale of inbound stocks. This said, Japanese equities rebounded on the 10th upon the announcement of brisk US employment data.

In mid-September, the risk of global trade frictions seemed to recede slightly as Trump’s newly announced tariffs on $200 billion worth of goods were lowered down to 10% till year end, easing investors’ concerns.

During the month, the Japanese market gained confidence on the back of a depreciating Yen, which followed the hike in the US long-term yield. The “risk-on” mood returned to markets when the Turkish central bank raised interest rates sharply on 14th September. Market sentiment was reassured when Prime Minister Abe was elected LDP leader for the 3rd time on the 20th. The market further reacted positively to the Japan-US trade talks summit during which the US agreed to defer additional tariffs on automobiles, while discussions continued, leading auto-related stocks to rally. As a result, the Japanese market gained for 8 days consecutively (12th to 26th), with the Nikkei 225 superseding the 24,000 level for the first time in 8 months.

The TOPIX closed the month at 1817.3 (up 4.7% MoM), with the Nikkei 225 finishing at 24,120 (up 5.5% MoM). In terms of sector performance, all 33 sectors gained. The best five performers were mining, fishery and agriculture, warehousing, oil, and pharmaceuticals, with electricals, metals, construction, textiles and air transportation contributing least to the positive return.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 28 September 2018 gained 6.6%* compared with that of 31 August, while the TOPIX rose 4.7% during the same period. The Fund put one new name (Penta-Ocean Construction) into the portfolio, with one stock (Sekisui Chemical) sold out.

The Yen started the month at 111.03 against the US dollar, and traded in a range between 110 and 114 intramonth. During September, the Yen slowly retreated on the back of increasing crude oil prices and the US long-term yield. When the US long-term yield rose above 3% on the 14th, the Yen depreciated further, ending the month at 113.70.

The “work-style reform-related bills” were enacted on 29 June 2018, in principle capping overtime at 45 hours per month and 360 hours per year. This said, highly-paid professional workers such as researchers and consultants are exempted from this rule.

The bills will come into effect on 1st April 2019 for major corporations and will be implemented one year later across small and medium companies. The implications are likely to encourage companies (1) to increase staff numbers and (2) to raise capital expenditures in order to improve productivity.

According to the BoJ’s “Tankan” September survey, the business conditions diffusion index (DI) for large manufacturers stood at +19 (+21 in June), marking a third straight QoQ decline. This likely reflects a combination of factors, including natural disasters between July and September, the rise in crude oil prices and concerns over trade friction. The DI for large non-manufacturers worsened for the first time in eight quarters, standing at +22 (+24 in June). Against the above, the FY2018 capex plan (all companies in all industries) stood at +8.5%, recording a slight upward revision from the June survey (+7.9%), at the same time marking the highest level since 1990.

In Japan, the labour shortage remains quite severe, with the employment conditions DI (excessive minus insufficient employment for all companies in all industries) decreasing from -32 in June to -33. The Tokyo core CPI (excl. fresh food) rose 1.0% YoY, superseding the market consensus of +0.9% YoY. The Investment Adviser expects the continuous rise of energy prices and tighter labour conditions to impact additional expenses such as distribution costs.

The office vacancy rate in Tokyo 5 wards continued to decline from its peak of 9.43% in June 2012 to 2.45% in August 2018. The supply of office buildings is expected to jump from 0.76 million m² in 2017 to 1.47 million m² in 2018, which the team think may be a result of the work-style reform bills.

Going forward, the Investment Adviser expects the work-style reform related bills to continue to positively impact the economy and inflation in both, the short and medium term. Judging from current supply-demand conditions in many industries, companies may be able to pass on rising costs to consumers.

Against the backdrop of Japan’s vulnerability against natural disasters and the expectation of sizable fiscal spending to be announced in October or November, the team are in the process of adding one additional name in the construction sector to the portfolio. The Investment Adviser remains quite confident regarding the outlook of both, the Japanese and world economy, which is why the Fund is overweight with regards to economic sensitive sectors such as energy, banking and machinery. At the same time, defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Funds as of 09/10/18 and are based on internal research and modelling.