Japan looks West in a quest for the best

Japan’s government was dissolved on 21 July in advance of the 30 August election which should herald a new era in Japanese politics. A win for the Democratic Party of Japan (DPJ) would see an end to the almost permanent rule since 1955 of the Liberal Democratic Party (LDP). A change like this would permeate throughout the entire country as fiscal policies are re-written, stimulus packages are re-allocated and the country’s worsening demographic profile is tackled aggressively through measures to boost population growth, support the elderly and improve working conditions across sectors. The DPJ realises that the current highly bureaucratic structure of government does not work and has looked west to Europe to provide an example of how a more decisive government can operate.

History may regard this forthcoming election result as a defining moment for Japan. The DPJ, whilst vastly inexperienced in ruling the country, are firm favourites to win this election and that in itself has lifted optimism for Japan’s future, which has been reflected in the market strength over recent weeks. Initial indications suggest that the DPJ will focus efforts on the local consumer and domestic markets before looking to engage more actively with the international community, from a policy perspective.

Portfolio positioning leading into the election will be crucial for fund managers to garner relative outperformance. Managers investing in the wider Asian region may still be smarting from the surprise Indian election results that caused markets to rocket on the first trading day post the results. A repeat of the Indian market reaction in the more conservative and developed Japan is highly unlikely, however, some market commentators are predicting that the election could result in a sustained period of outperformance from Japan.

We believe that one of the key beneficiaries of a strong DPJ win will be those stocks linked to baby and child care products such as Unicharm, as well as the medical care industry where stocks such as Nichii Gakkan should prosper in the new environment. The party is also keen to promote green initiatives in the country, and with Japan leading the field in some new technologies, companies in this sector such as Ulvac and Japan Wind should be within the winners circle once the 100 day review of the new government approaches.

Timing as always is critical to entering the markets, and whilst some stocks have already seen strong rallies in the anticipation of a DPJ victory, there are a number of stocks that will undoubtedly creep below the radar of many fund managers, and it is these stocks that the Ashburton Asia Pacific Equity Fund will be looking to exploit going forward.