Japan’s vulnerability to natural disasters should urge sizable fiscal spending

During the first half of the month, the Japanese market weakened following a decline in the Chinese market and concerns over trade frictions between the US and China. Simultaneous to the sharp decline in the Turkish lira, the Japanese market dropped, but gradually recovered when the impact was seen to be limited.

Monthly Fund Commentary
24 Sep 2018

During the first half of the month, the Japanese market weakened following a decline in the Chinese market and concerns over trade frictions between the US and China. Simultaneous to the sharp decline in the Turkish lira, the Japanese market dropped, but gradually recovered when the impact was seen to be limited.

In late August, the Japanese market rebounded, supported by a brisk US market and a depreciating Yen. Early in the month, the Japanese market gained on the back of positive earnings results and a depreciating Yen. The 10-year JGB yield increased from 0.062% to 0.132% after the Bank of Japan’s governor Mr. Kuroda commented that the Bank would tolerate a 0.2% deviation (instead of 0.1% previously) of the 10-year JGB from its 0% target. Following this announcement and the subsequent rise in yield, Bank stocks were bought. This said, the market declined from the next day onwards due to decreasing markets in the US and China. At the same time, the Chinese Yuan also depreciated against the US dollar.

In mid-August, the market declined for 4 consecutive days following weak domestic economic data (such as June’s core machinery orders which were down -8.8% MoM), and a sharp decline in the Turkish lira of more than 20% that led to a risk-off mood in the market and thus triggered an appreciation of the Yen.

Subsequently, the Japanese market rebounded as the lira recovered. This said, a “wait and see stance” was taken before the US-China trade discussions and the Jackson Hole Economic Symposium. Later in the month, the Yen appreciated when Trump criticised the Fed’s interest rate hike. The US market however surged shortly after, with the risk-on market returning and the Yen depreciating, leading the Japanese market higher. In late August, the Japanese market rallied on the back of solid economic data (such as June’s labour survey which showed a cash earnings growth of 3.3%, the highest since 1992).

The TOPIX closed the month at 1,735.4 (down 1.0% MoM), whereas the Nikkei 225 finished the month at 22,865.2 (up 1.4% MoM). In terms of sector performance, 23 out of 33 sectors declined. The best five performers were pulp & paper, services, miscellaneous manufacturing, pharmaceuticals, and oil. The worst five performers were construction, foods, rubber, metal, and air transportation.

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese yen basis as of 31 August 2018 lost 1.1%* compared with that of 31 July, whilst the TOPIX declined 1.0% during the same period. The Fund added one new name (NIDEC) to the portfolio with no stocks sold out.

In the past few months, Japan has shown its vulnerability to natural disasters. Japanese islands were hit by a succession of typhoons and disasters related to heavy rain including massive flooding and landslides that left more than 220 people dead in July. On 4th September, Typhoon Jebi, the most powerful typhoon in the past 25 years, hit Western Japan, severely damaging Kansai International Airport with a rainstorm of 58 m/second force winds. Kansai International Airport is the third busiest airport in Japan with 28.8 million of domestic and foreign passengers in FY2017. In particular, it is the key gate way to Asian countries such as China, South Korea and Taiwan.

Two days later, a 6.7 magnitude earthquake hit Hokkaido, in northern Japan, causing the water supply to stop and a massive power outage in the region. Hokkaido has become a very popular tourist destination with 56.1 million tourists visiting in FY2017. Tourism is one of the key growth sectors for the Japanese economy, triggering large capital investments and sound personal consumption.

In December 2013, Japan enacted a law called “Basic Act for National Resilience” with the aim of (1) preventing human loss by any means, (2) avoiding fatal damage to important functions for maintaining administration as well as social and economic systems, (3) mitigating damage to the property of the citizenry and public facilities, (4) achieving swift recovery and reconstruction following natural disasters.

The Japanese government is expected to commence the next extraordinary Diet at the end of September or in early October after the election of the President of the Liberal Democratic Party, which will be held on 20th September and will most likely be won by Mr. Abe.

One of the biggest topics in the Diet should be how much will be spent in the FY2018 supplementary budget and the coming 3 years plan to strengthen the Japanese archipelago.

Second quarter (April- June) GDP was revised up from 1.9% QoQ annualised to 3.0% QoQ annualised. Private capex was a leading growth engine, having gained 12.8% QoQ annualised, depicting a significant upward revision from the preliminary figure of 5.2% against the backdrop of continuing labour shortage and an increasing need for higher productivity.

This said, the recent natural disasters in Japan and the US-China trade frictions may damage business and consumer sentiment, in which case it will be crucially important that the government adopts an aggressive fiscal spending approach to achieve sustainable growth, which the Investment Adviser hopes to take place soon.

Witnessing Japan’s vulnerability to natural disasters and anticipating the announcement of sizable fiscal spending in October or November, the team has added one more construction name to the portfolio. The Investment Adviser remains quite confident regarding the outlook of both, the Japanese and world economy, which is why the Fund is overweight with regards to economic sensitive sectors such as energy, banking and machinery. At the same time, defensive sectors such as foods, pharmaceuticals and utilities continue to be avoided.

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Funds as of 10/09/18 and are based on internal research and modelling.