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20th March 2015

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Andrew Rose, manager of the Elite Rated Schroder Tokyo fund.

After decades of false dawns for investors, a stimulus-pumped Japanese market has delivered strong returns in recent years. The market rallied throughout 2014 and into 2015 supported by quantitative easing, but more recently it has been driven by lower oil prices, a weaker yen and a tight labour market. On April 20th, the benchmark index rose to a new 15-year high as the yen softened against the U.S. dollar.

Some observers have questioned whether this run can continue, but Andrew Rose, manager of the Elite Rated Schroder Tokyo fund, argues that investors can expect further healthy returns from the Japanese market.

What do you consider some macroeconomic tailwinds in Japan?

“Abenomics” – the economic programme implemented by Prime Minister Shinzo Abe – has not yet achieved its goals. It hasn’t delivered growth and has not really been of broad benefit to Japan yet. Under Abe’s watch, both real GDP and real incomes have been flat lines.

The re-firing of the first two arrows of the programme (aggressive monetary policy and more flexible fiscal policy) is an implicit recognition that more needs to be done. This begs the question: will it be more successful this time around? That remains to be seen, but lower oil prices and a tight labour market increase the chances of success. The dramatic fall in the oil price has been very positive for the Japanese economy. We are now seeing signs that the domestic economy is in recovery.

How has the stock market performed against Japan’s economic backdrop?

Equities look promising. The macroeconomic backdrop is supportive, but there is a positive bottom-up story too when you consider valuations, profits and incentives to improve corporate governance.

The Japanese market has performed very strongly and it hasn’t been diluted by a falling currency. Good news is not limited to the economy; it is also company specific. We have had an accommodating environment for corporate profits as assisted by a softening yen and the decline in the oil price.

Currency has had a major impact on Japanese markets recently; what is your near-term view on the yen?

Many observers remain focused on the yen’s trajectory, as it depreciated sharply in 2014. The outlook for the currency is hard to predict, but I remain cautiously positive that the bulk of its depreciation is over.

The key driver for the yen will be how the Bank of Japan responds to the impact of lower oil prices on core inflation. Ultimately a lower oil price has a stimulatory economic impact, but it also makes meeting short-term inflation targets impossible.

What are some economic concerns facing Japan?

The short-term focus of Abenomics is likely to be the implementation of previously discussed initiatives, such as an economic stimulus package, corporate tax cuts and trying to push ahead with nuclear restarts. Longer term, the extent to which Mr. Abe uses his renewed mandate to introduce economic reforms to raise the underlying rate of growth, will be an area of focus.

In 2015, the focus will be on whether deflation is convincingly vanquished, and the trend in real incomes will be an important indicator here. Furthermore, there will be a great deal of interest in whether, at the micro level, moves toward better corporate governance and balance sheet efficiency are sustained.