Stagnant or falling wages could pose a risk to Japan's economic story, according to equity star Ian Heslop.
‘What we need to see is wage inflation if the Abenomics plan is to make real change,’ the Citywire AA-rated manager, who co-manages the Old Mutual Japanese Equity fund with Amadeo Alentorn and Mike Servent, told Citywire Asia.
‘Abe is in a position that will not last forever: personal ratings are high (though falling), control over all the political levers and a co-operative Bank of Japan. There is a feeling of 'now or never' for the Japanese economy.
‘The critical risk to the Japanese investment story is this is not followed through and the economy falls back into low/negative inflation and spotty growth,’ he said.
In June, real wages of Japanese workers fell 3.8%, the biggest drop in more than four years. Boosting real wages is considered critical to improving consumption and lifting Japan out of its longstanding deflationary environment.
The London-based manager remains cautiously optimistic about prospects for the Japanese market, despite a sharp 6.8% contraction in GDP (annualised) for the quarter ended June.
He noted that the equity market has been markedly re-rated over the past 18 months. ‘Currently, the market looks fairly valued, not cheap but not excessively expensive,’ he added.
‘For now, markets are pricing in a continuation of the good earnings environment seen over the past one and a half years.’
Next challenge for Japan
Heslop said that if the government managed to stoke inflation in the economy, the next challenge would be to tackle high debt levels -- without hurting the efforts to boost domestic consumption.
'The increase in sales tax, a first step on the long road to sustainable debt levels in an inflationary environment, has had a smaller impact than expected, though has still held back consumer spending post the rise,’ he added.
At the end of July 31, the top three sectors in the Old Mutual Japanese equity fund were industrials (25.11%), consumer discretionary (23.68%) and financials (15.28%). Heslop said the fund is currently overweight industrials and information technology and underweight financials and consumer staples.
In the five years to July 31, 2014, the fund has returned 75.59%, while the benchmark Topix has returned 39.48% in US dollar terms.