Country watch: Japan

Adopting a new perspective

The success of the first two tranches of Japan’s economic policy overhaul may be attributed to several factors. Some of these factors are cultural and deeply ingrained in how Japanese society responds to difficult change. Consider, for instance, the nation’s response to the Fukushima nuclear reactor meltdown following the massive earthquake that shook the country in 2011. Citizens and officials responded (and continue to respond) in an orderly, direct way. In the face of calamity, the Japanese approach has been to press forward rather than succumb to panic and disarray.

Other evidence in favor of Japan’s tenacity is more direct, especially when looking at performance in the corporate sector. Japan’s businesses boast achievements such as: (1) production of some of the best cars in the world; (2) a technology sector that is at the forefront of innovation; and (3) material contributions to just about every advanced industry in the world. Supported by these traits of endurance and resolve, we think it makes sense for bearish investors to consider taking a new perspective on Japan’s reputation for stagnation.

At the same time, we realize that for some investors, the road to a new perspective may be bumpy. Japan’s future could be affected by several headwinds, not least of which is a heavy load of government debt (relative to gross domestic product) that has increased steadily for a long time. Furthermore, administration officials will have to find ways to execute on the third tranche — the so-called “third arrow” — of structural reforms that have been put forth by Prime Minister Shinzo Abe. These reforms are by no means guaranteed to succeed, because they will involve deregulation and substantial changes to well-established industries. A mixture of debate and wringing of political capital will likely be part of the picture.

In light of what we’ve noted above, we are taking a positive — but balanced — view of the investment landscape in Japan. We believe the country has the will and perseverance to sustain economic health. At the same time, we will be monitoring potential headwinds created by sovereign debt levels and structural reforms.

The views expressed represent the Manager's assessment of the market environment as of June 2014, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

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Notes from the desk