Strong Rally in Japanese market

Japan retained its place at the top of the IMA sector table this month, with funds now up by an average of 15.4% for the year to date. Much of this performance has come from the depreciation of the pound versus the yen, but the stockmarket has performed strongly too.

The Nikkei was the best-performing developed market over the month – rising 9.5%, ahead of the FTSE 100, which rose 6.1%, the S&P 500, up 5.8%, and the FTSE Eurofirst index, up 7.2%. Japan fund managers are still suggesting stocks in the region are fairly priced and that many companies are likely to beat earnings expectations.

As ever with Japan, the economic picture was mixed. Fourth-quarter GDP numbers were revised down from 4.6% to 3.8% as private sector inventories proved weaker than expected. However, the government suggested a double-dip recession had become less likely. Analysts in the region backed that view and retained some optimism on the outlook for the Japanese economy.

This optimism was premised on a number of factors, the first being a muted rise in consumer spending – just 0.7% – in the final quarter of the year, which suggested the recovery may be broadening out from purely government-led stimulus packages. Equally, unemployment fell below 5% for the first time in a year in February. A recovery in exports has been key to improving employment prospects.

Debt remains a worry and there is no shortage of analysts suggesting Japan will be another ‘next Greece’. Investors are still buying Japanese government bonds, even with coupons as low as 1.4%, and the most recent government bond issue went without a hitch. With government bond issues exceeding tax revenues in 2009, the sustainability of the situation looks fragile but, for the time being, Japan ticks on.

That said, industrial production figures slipped from January to February, their first fall in a year. Admittedly, they were still up 31.3% on last year, but it did lead some analysts to question whether government confidence in an unbroken recovery may be misplaced. Deflation persists and prices were down a further 1.2% in February.

It is the strength of the corporate sector, however, that is giving fund managers cause for optimism. With low debt, improving earnings and their strong leverage towards the global economic recovery, Japanese companies look in rude health relative to many of their global peers. Valuations are low compared to their 20-year average but the question remains whether they can transcend Japan’s still parlous economic conditions.

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