Weindling says that accession to the trans-pacific partnership is a significant step for the country, as is the introduction of NISAs, modelled on the British ISAs.
However, he says the major reason to be bullish on Japan next year is growing evidence of inflation, which he says that Japan-based managers such as himself can see clearly.
The manager says that many investors have pre-conceived notions of Japan that were formed many years ago and have not changed as the country has developed.
“Nobody has looked at Japan for eight years and they have a picture in their head that is no longer true,” he said.
Here are the chief misconceptions he says investors have and the consequences they have on investing in Japan.
The third arrow still has to be implemented
Many investors and commentators fret about the extent to which politicians will be able to implement the “third arrow” of reforms, made up of deregulation and structural changes.
Investors need to wait and see how they go, is the argument. However, Weindling says that investors are underestimating the amount of reforms that have been implemented already.
The signing of the TPP agreement is a huge step for Japan, he argues, as the leader of the party most followed by farmers has implemented a policy that will challenge the subsidies they receive – a key indication of how the country is behind the reforms.
“People are fed up with deflation, with the country being seen as on the decline,” he said.
The manager says that the NISA scheme is being heavily advertised by banks in Tokyo streets, and the word on the ground is that banks are struggling to employ enough staff to cope with demand.
This insight comes from the white collar staffing company he owns. Being permanently based in the country, as no other managers are, is essential to pick up what is really happening on the ground, he says.
The manager also owns companies supplying construction workers. The sector has seen significant wage growth as activity picks up and the skills, under-utilised for so long, can command a premium.
Japan’s tech companies are strong
Weindling has almost no technology in his fund except for robotics manufacturers.
The big companies that most investors associate with Japan are largely busted flushes that have failed to adapt to a hanging marketplace and are in many cases selling outdated products, he says.
“The large tech stocks like Sony, Canon and so on failed to keep up with Samsung and definitely with Apple,” he said.
“Canon is still the number-one in cameras, printers and copiers, but nobody is using them anymore: people buy far fewer cameras,” he said.
The country has also been slow to adapt to changes in the computer game industry in which it was a world leader for many decades.
“That was one we got wrong,” Weindling said.
The manager thought that it would be brands such as Sonic and Mario that would survive the changes in the industry, but in fact new entrants have come along to dominate the online and mobile gaming industries, and barriers to entry have become so low that new entrants are common.
UK investors probably over-estimate the penetration of e-commerce in Japan as well, he explains. While it makes up 10 per cent of the UK economy, it is only 3 per cent in Japan, and Weindling says that he is buying companies that should prosper as this gap closes, such as price comparison websites and online retailers.
You should buy exporters
Weindling has been buying domestically facing stocks since the Abenomics revolution began, in contrast to many rival funds, which thought a devaluation of the yen presented opportunities in these sectors.
“We were aware that monetary policy was very aggressive and could lead to a weakening of the yen, and a lot of people bought exporters. However, we believe a lot of exporters have lost their competitive edge or are making the wrong products, so the weakening of the yen is less important,” he said.
Far more important for investors is the return of inflation, which will support household expenditure.
“The group of exporters we do like are in factory automation,” he said. “Wages have gone up in China by 15 to 20 per cent over the last 20 years, so there’s a great deal of cost pressure in manufacturing.”
“Companies can move somewhere cheaper, like Cambodia, or they can go to the US for cheap shale gas, or they can automate. In robotics, everything is Japanese.”
Demographics are a threat
Japan’s demographics provide opportunities for investors, Weindling says.
“In time the population will fall, which is great for some companies,” he said.
Weindling owns the largest producer of adult nappies, which is prospering as it sells to an aging population.
The company also makes nappies for pets. Older people in Tokyo like to buy pets, Weindling explains, and there are now more pets than children in the city.
He also owns a company that supplies karaoke equipment to old people’s homes. This is a cheap way that the institutions can entertain their inhabitants.
Japanese companies have poor corporate governance
Japanese companies have long been regarded as secretive and uninterested in shareholder concerns, but this is changing, the manager says.
In fact, many investors are looking for ex-UK funds to add to their equity income portfolios, and Weindling says that more should consider Japan.
“There are a lot of misconceptions about Japan,” he said. “The dividend yield on Japanese companies is the same as in the US.”
“You never would have heard me talking about dividends in Japan 10 to 15 years ago.”
JPM Japan has the fourth-best returns of any fund in its sector over one year – 34.01 per cent. It has ongoing charges of 1.68 per cent.
Performance of fund vs sector over 1yr
Source: FE Analytics
In a recent FE Trustnet article, the manager’s closed-ended JP Morgan Japanese IT was picked by a number of analysts as a recovery story worth buying into. It has ongoing charges of 0.81 per cent.
