Reform and recovery in Japan

26 June 2014

After years of difficulties, macroeconomic figures in Japan are showing definite improvement: GDP grew at an annualized rate of 6,7% in the first three months of the year, the YoY inflation rate in April came to 3,4% and the labor market is robust. Indeed, unemployment is now at 3,6%, various companies are hiring part-time workers with open-ended contracts and bonuses have risen by 5-10% even for small to medium-size companies. In line with the Bank of Japan’s forecasts, the economic recovery has postponed talks of ramping up quantitative easing, which has triggered sales of many macro funds.

In terms of reforms, the second half of June was particularly important for the market, as Abe announced the highly anticipated measures to sustain growth. The most significant of these are the cut in the corporate tax rate, the rebalancing of pension funds’ asset allocation (with  GPIF at the top of the list), labor market reform, energy market deregulation, the reorganization of the farming industry and the creation of special economic areas.

At microeconomic level, managers specialized in equities continue to see earnings on the rise and dramatically improving fundamentals. The automotive and related industries are believed to offer opportunities, bolstered by the recovery of the US market, which remains crucial for Japanese manufacturers. Optimism surrounds the banking industry as well, which is trading at discounted valuations compared to the rest of the market and which provides options in a context of higher inflation and potentially higher interest rates.

In terms of Kairos’ management offer, we continue to be invested in Japan through active long-short managers that have, on average, generated a significant alpha and positive performances since the start of the year. In addition, the delta between the downwards trend in equities and the growth in corporate earnings, with the consequent market de-rating, has created extremely interesting stock picking opportunities for active managers.