Japans future still unclear

The Japanese markets ended the year with a flourish. The Nikkei rose 13.62% in December, leaving it 17.3% up on the year and helping it catch up with other developed markets. Its performance is now in line with the FTSE 100, which was up 18.65%, the Dow Jones, up 15.52%, and the FTSE Eurofirst, up 22%.

The last-minute boost came largely on the back of a weakening yen, which relieved the pressure on exporters. After the month end, Japan’s new finance minister said he supported a weaker yen – a significant reversal in policy from his predecessors. He added he would work to ensure the yen remained at around 95 to the dollar, a target set by Japanese business leaders. The yen is currently trading at around 93 to the dollar.

Markets were also given a boost by the success of individual companies. Canon won approval for its takeover of a Dutch rival Oce while brewers Kirin and Suntory also benefited from M&A activity. Technology shares took the lead from their US rivals and moved up substantially last month – US technology groups had reported an improvement in earnings and investors expected similar earnings upgrades in Japan.

December also saw a new stimulus plan from the government. Only in Japan could a plan to deliver average growth of 2% be called ‘ambitious’, but the government said it wanted to create new markets in environmental technology, healthcare and tourism. The initiative, if successful, should create nearly five million new jobs.

However, it costs money Japan simply doesn’t have – ¥77,200bn (£520bn), to be precise – and December also brought bad news on the recovery. This was weaker than expected, with third-quarter growth revised down from 1.2% to 0.3%, and raised the real possibility the economy may begin to slow again in early 2010. Business investment remains the weak spot with private consumption still stable. The economy still has the fog of inflation hanging over it as well as the risk of debt downgrades.

Japan funds achieved the ignominious position of the worst-performing sector of 2009, with the average fund dipping 3.1%. It was the only sector, apart from UK Gilts, which actually lost money for investors during the year. That said, the average fund figure did mask a broad range of underlying fund performance, which varied between -11% and +11% for the full year. In general, Japan managers were simply too cautious, not trusting in the recovery. They may be right in the long run, but the markets did not agree in the short term.