Page 6 - DIY Investor Magazine | Issue 34

JAPAN’S QUIET RECOVERY HOLDS PROMISE FOR INVESTORS
Hisashi Arakawa, Investment Manager abrdn Japan Investment Trust PLC
• Japanese shares sold off as Russia escalated tensions with Ukraine.
• Companies are passing on rising input cost to their end customers.
• Recent earnings reports for the Japanese corporate sector have been buoyant.
Japan has not been able to escape the global stock market volatility seen in the wake of the Russia/Ukraine crisis. However, with less geopolitical involvement and a robust corporate sector, it may prove a port in the storm for investors.
Japanese shares sold off as Russia escalated tensions with Ukraine.
However, the country’s stock market has outperformed the global average, with value stocks and smaller companies showing the strongest performance.
The preference for value stocks is perhaps understandable given the shifting interest rate environment and inflationary pressures. However, this has left many high-quality stocks looking good value at a time when, we believe, quality traits such as pricing power and resilient balance sheets will be particularly important.
Inflation is an issue in Japan as the impact from the sharp rise in commodity prices puts pressure on companies’ profitability. However, price rises are relatively low compared to other developed markets across the globe.
The Tokyo core consumer price index (CPI), which excludes fresh food but includes energy, rose 0.8% year-on-year in March.
‘WE BELIEVE QUALITY TRAITS SUCH AS PRICING POWER AND RESILIENT BALANCE SHEETS WILL BE PARTICULARLY IMPORTANT’
This is marginally higher than forecast and is likely to move higher as energy prices rise, but doesn’t come close to the 6-7% rises seen in the UK and US.
At the same time, recent news flow suggests that price increases are increasingly widespread: Starbucks Japan, for instance, raised its standard beverage prices by 22% and its coffee bean prices by 40% in mid-April; this is the first time since 2006 that the company has raised its coffee bean prices. With the continual rise in input prices, investing in companies with pricing power will be important – and a number of our invested holdings are intent on maintaining their profitability.
Meanwhile, Japan’s economy is finally reopening, albeit gradually, after continual waves of Covid-19 infections and concerns of the burden on its healthcare system. In its latest World Economic Outlook, the International Monetary Fund (IMF) predicts growth of 3.3% for Japan over the year, though fourth quarter GDP growth came in at a punchy 4.6%.
Japan’s quasi state of emergency was lifted in 18 prefectures, including Tokyo and Osaka, towards the end of March.
The country also relaxed its border controls further from March, and the booster shot campaign that began last December had reached 41% of the population as at the end of March.
‘JAPANESE COMPANIES ARE WELL-VERSED IN OPERATING IN DIFFICULT CLIMATES’
CORPORATE SECTOR BUOYANT
However, as always, it is not the economy that is interesting in Japan. It helps to have a supportive backdrop, but Japanese companies are well-versed in operating in difficult climates.
DIY Investor Magazine · July 2022 6