Japan's inflation comeback prompts investors to tear up old playbooks

FE Team | Published: November 21, 2023 22:48:00

LONDON/TOKYO, Nov 21 (Reuters): Global inflationary forces are finally seeping into Japan's economy after decades of falling prices, forcing investors to radically rethink their Japan bets as the Bank of Japan considers a major policy shift.
International investors, who have long favoured stocks benefiting from Japan's ageing population or a weakening yen, are tearing up their playbooks to focus on expected higher interest rates, more generous dividends and a revival in consumer spending.
The policy switch has been slow in coming but could herald an entirely new way of investing in Japan if a predicted long-term inflation rate of 2 per cent in 2024 really happens.
Japanese shoppers who no longer expect prices to keep falling may make big purchases. If the BOJ pulls interest rates above zero for the first time in years, banks' lending margins could rise.
Japanese stock markets have already rallied to around their highest since 1990, with consumer and financial stocks outperforming domestic indexes. On the downside, inflation creates a bleak outlook for Japanese government bonds.
"Interest rate policy is undergoing a historic change," said Shigeka Koda, chief executive of the $500 million Singapore-based hedge fund Four Seasons Asia Investment.
"Something new is in the offing."
Japan's ageing demographic has made a Japanese crematorium company one of the top picks for foreign investors, with its shares up almost 700 per cent in five years.
Koda's top positions have included the crematorium operator - Kosaido Holdings - as well as Rheon Automatic Machinery, which sells cake-making robots to help food manufacturers deal with a shrinking workforce.
But in August, for the first time in the 17-year history of his fund, Koda picked a Japanese bank, Kyushu Financial, as his largest position, because he believes Japanese interest rates will rise.
Steve Donzé, deputy head of investment at Pictet Asset Management in Tokyo, said he had also been buying Japanese bank stocks.
For Junichi Inoue, head of Japanese equities at Janus Henderson, consumer businesses with the pricing power to increase revenues and profits by passing higher energy and food costs on to customers were the focus.
"I do like convenience stores," he said. "Margins have really been going up, earnings have been good - positively surprising."
Japanese wages, adjusted for inflation, fell in the 18 consecutive months to September. But big employers are expected to agree bumper pay hikes in the spring.
"You really need to see services inflation come through in order for inflation to be sticky, and that's driven by wages," said, James Halse, portfolio manager at Platinum Asset Management in Sydney.
Data out on Friday is expected to show core consumer prices accelerated again in October, staying above target for a 19th straight month.
Global fund managers are the most positive on Japanese stocks since March 2018, a Bank of America survey published on Nov. 14 showed. And Warren Buffett is buying.
Japan's Topix index, one of the key indexes on the Tokyo Stock Exchange, has jumped 26 per cent this year, helped by corporate governance reforms.