“In the short term a big threat is a lack of global economic growth as Japanese growth is highly correlated to the rest of the world. In the longer term there are huge debt and demographic challenges to address: Japan’s population is around 127m, and it is predicted to fall to just 95m in 35 years’ time.
“From an asset-allocation perspective, there is a strong argument to have exposure to Japan. Maybe the future will be brighter and maybe we won’t see another false dawn, although we have heard that many times before and the story often ends with Japanese investors being disappointed.”
Michael Stanes, investment director at Heartwood Investment Management, points out that Japanese equity performance continues to be driven by movements in the currency.
“As investors have sought the safe haven status of the Japanese yen, driving the currency up, large-cap exporters have been hurt and this has weakened sentiment towards the equity market as a whole,” Mr Stanes explains.
“The BoJ’s negative interest rate policy has also been a key performance driver, with bank stocks underperforming on concerns around the impact of negative interest rates on profits.
“The Japanese equity market is notoriously volatile and investors should be prepared to take a long-term view. We have also seen the impact of significant currency movements this year, so sterling-based investors in Japanese equities have made strong returns, despite negative local currency returns.”
Nyree Stewart is features editor at Investment Adviser
