The chief investment officer of $7.4 billion Sparx Asset Management, Tadahiro Fujimura, has talked bullishly about a resurgence in business confidence in Japan.
Fujimura said he had been encouraged that even after China’s stock market slump and shock RMB currency devaluation in July and August this year, respectively, he had seen no drop-off in Japanese companies’ capital expenditure plans.
“Finally Japanese companies are changing,” he said at the Most Influential 2015 summit staged by Bloomberg Markets in Hong Kong this week. “They were saving money during deflation, but since last year they have started to spend on R&D [research and development].”
Fujimura sees the shift from negative to positive price movement as the most important factor driving Japan’s economy.
“A lot of people are very pessimistic about the recent CPI [consumer price inflation] numbers,” he observed. “It’s not the absolute number, but the direction from negative to positive [that’s important].”
Inflation is running at about 0.5% in Japan, far below the Bank of Japan (BOJ)’s 2% target. CLSA global equity strategist Chris Wood recently suggested BOJ governor Haruhiko Kuroda had set the wrong inflation target of 2% because it included energy, although he was otherwise positive on relatively healthy inflation figures in Japan.
Fujimura noted the transition from 16 years of deflation to mild inflation had seen Japanese companies shift their focus from cost-cutting to innovation.
He also pointed out that Japanese companies were also spending on buying back shares, with Fujimura forecasting the 2015 figure for share buybacks would be Japan’s highest on record, with dividend payments already at historical highs.
He said he did not see a new round of quantitative easing from the BOJ, which market consensus anticipates by the end of this month. “As long as the domestic price movement is healthy, I don’t think BOJ will ease more because it did too much in the past,” the CIO said.
He added he expected the yen-dollar rate to stay at around 120. “Many manufacturing companies told me 120 is weak enough to compete against other countries. Manufacturers have started to get confidence about their businesses,” he explained.
With wages increasing in China, Fujimura said he did not see future renminbi weakness as negatively impacting Japan’s economy. In fact, he argued that Japanese company management was increasingly turning to Southeast Asia for investment opportunities amid declining expectations about China’s economic growth rate.
Overall, Fijimura felt Japan’s shift from deflation to inflation along with a revival in infrastructure spending would be a more fundamental driver of Japan’s economy over the next four years than the Trans-Pacific Partnership (TPP), the regional trade accord that was agreed on October 5 between the US, Japan and 10 Pacific Rim nations.
The TPP agreement will see 98% of tariff barriers on trade eliminated between the 12 nations once ratified by lawmakers in each country. Fujimura suggested TPP could have significant impact over the long term, but less of a short-term impact.
“After the Olympics [in Tokyo in 2020] we believe new ideas – such as TPP, immigration and new industries – will spur growth,” he explained. “TPP may be the catalyst for these low-productivity industries to improve,” he said, pointing to agriculture, health and pharmaceuticals.