Japan’s rally has three legs, says GAM’s Ben Williams

Ben Williams, responsible for GAM’s Japan Funds, says that there are three legs to the country’s equity rally.

The first leg of the Japanese equity rally driven by yen depreciation is almost certainly over, yet we believe the Japan story still has some way to run.

Trough to peak, the yen appreciated by 63% against the dollar and 79% against the euro, which meant Japanese companies simply could not compete overseas. Daihatsu, for example, gave up selling cars in the UK altogether. The yen’s recent depreciation will allow many companies to go out and bid profitably for business.

The rally’s second leg will therefore be driven by companies rebuilding global market share. Japanese manufacturers have plenty of spare capacity which will ensure the marginal profit on orders will be high, providing a significant boost to profitability.

The third leg of the rally will be driven by higher returns to shareholders. In the US the biggest buyers of equities are companies themselves, and a majority have ongoing share buyback programs in place, providing support for equities. Japanese companies announcing share buy backs have typically performed well, however a strong yen has been one of the main challenges to such schemes with many companies not making enough profit to justify large buyback programs. As profitability improves, this should change.

Buybacks drive Toyota

From March 2002 until 2008 Toyota regularly repurchased shares. Profits suffered due to the global financial crisis, the strong yen and the Fukushima earthquake, hence preventing further buybacks. With the rebound in profits and a balance sheet with almost $70bn of cash, we expect Toyota will restart its buyback program, a move that would be positively received by the market.

Our focus will continue to be companies with good global market share, high operational leverage and strong balance sheets.


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