Historically, these tax increases in Japan have had quite a debilitating impact on the economy, he says. “The real headwind is the currency going strong again. For years and years, Japanese companies became inured to a rising yen and, in 2013, Abenomics and quantitative easing and suddenly you had this fall in the yen from 80 to the dollar to 120. This was a real tailwind for companies and profits benefited from that.
“Now we have a situation where the yen, compared with a year ago, is a lot stronger. It has happened at a time when you might have expected it to stay weak. I say that because at the end of January, the Bank of Japan – having had two and a half years of quantitative easing – decided that in addition to QE it would have negative interest rates.”
The economic textbooks say negative interest rates are a negative for the currency because the differential with other economies widens, but in Japan’s case the complete opposite has happened. “It has partly happened because the yen is viewed as a safe-haven currency, rightly or wrongly. When people get worried about the global backdrop, they tend to buy safe-haven assets such as gold or yen.
“So, in January and February, with all the worries about a global recession and a Chinese hard landing, and people looking for safe havens, the yen benefited.”
Tough going
Rose argues that the Bank of Japan will go more negative on interest rates at some point, which will probably have an impact on the currency. “It’s a slightly depressing thing to say in spite of Abenomics – a lot of the outlook does depend on the yen stabilising, or getting slightly weaker.”
His stockpicking focus over the past 12 to 18 months has been on buying domestic, low-volatility, almost bond proxy-like equities, but taking a longer-term view, some of the more cyclical parts of the market look more interesting.
“People recognise that the Abenomics project is more challenged than it has ever been, and some people think the key target, the 2% inflation, will never be achieved. As long as you get some inflation, don’t worry if it is 1.2% rather than 2%. Maybe it is the target that is wrong.
“Japan has demographic challenges, so it is even more difficult to get 2% inflation. The oil price is weak and that is making it hard to achieve that type of target.”
Looking ahead, the performance of the stock market is one of the key drivers that the government is nurturing.
