Updated 06 May 2022
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Japan has been in the news recently due to the rapid fall of the Yen against the dollar. Partly that reflects the dollar’s growing strength. The greenback has risen in value relative to all other G7 currencies so far in 2022.

But other forces may be at play too. Whereas central bankers around the world look likely to raise interest rates this year to counter inflation, the Bank of Japan (BoJ) has been reticent about doing the same. Japan has suffered from deflation for years and it seems BoJ governor Haruhiko Kuroda, who has long hoped for an inflation rate of 2%, believes a devalued Yen may actually be good for the country.

Investors will have to make up their own mind as to whether or not they agree with him. A cheaper Yen may stimulate Japanese exports and help kick-start the economy. It’s also crimping share prices, potentially making them more attractive for prospective buyers.

CC Japan Income & Growth (CCJI) may be one trust to look at for investors that are interested in the Land of the Rising Sun. The trust mainly invests in large cap equities and many of its holdings, including Nintendo and Mitsubishi Corp, make most of their money outside of Japan, so a weaker Yen is less likely to impact them. The trust has not been immune from the sell-offs in the year to date but, over the past 12 months, it is the only trust in its peer group to have delivered positive returns.

Opportunities may also lie further down the market cap scale, albeit with more risk attached to them. One of the potential problems with Governor Kuroda’s logic is that the inflation he is looking for has not come about in the way he likely would’ve hoped for.

Like many countries around the world, the BoJ has been pouring money into the Japanese economy for much of the past decade. The idea was that this would drive more spending, which would in turn lead to more investment, higher wages, and economic growth.

This has not really happened and the inflation we’re seeing now doesn’t appear to be the result of BoJ policy. Instead higher prices stem from external factors, like rising commodities prices. It’s not clear this will stimulate spending and it may even do the opposite. More importantly, the problems Japan is facing – a declining elderly population for instance – remain in play.

For that reason, investors may be interested in looking at JPMorgan Japan Small Cap Growth & Income (JSGI). The trust has had a tough 12 months, with inflationary fears hitting many of the high value names in its portfolio.

But much of that appears to be due to a change in sentiment, rather than company fundamentals. JSGI focuses heavily on businesses that attempt to tackle some of Japan’s structural problems. These have not gone away, nor has the growth potential they offer. It is hard, for example, to imagine automation systems like those offered by JSGI holding Money Forward going out of fashion any time soon.

Anyone weighing up putting money into JSGI should be prepared for short-term volatility. Small caps continue to feel the inflationary heat and that doesn’t show any sign of abating, but the JSGI team are attempting to tap into trends that aren’t dissipating and the trust may appeal to those seeking long-term exposure to the region, albeit they may have to endure a bumpy ride in the short term.

Past performance is not a reliable indicator of future results

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