Japanese equities struggle in grip of strong yen

Fund managers have been tipping Japan as a recovery play for at least two decades

Fund managers have been tipping Japan as a recovery play for at least two decades and, apart from a few healthy rallies, there is still little sign of anything long-lasting.

The “miracle economy” of the 1970s and 80s is consigned to the history books and Japan now struggles with deflation, slow growth and higher levels of unemployment than politicians like.

Average returns from Japan funds have been negative for 12 of the last 20 years, falling 39% in 1990 and 30% nine years later.

It’s a far cry from the heady days of Christmas 1989 and New Year 1990 when the Nikkei came within a whisker of 39,000. By March 2009, the leading index was down near 7,000 and is currently close to a 16-month low just above 9,000.

Despite producing some of the world’s best known manufacturing brands including Canon, Sony, Nintendo, and carmakers Honda, Toyota and Nissan, the country has failed to deliver, harmed by ineffective lawmakers and a failure to initiate any meaningful reform of financial protectionism.

A strong yen has certainly done exporters no favours. The Japanese currency is close to a 15-year high against the dollar, making Japanese goods less competitive compared to rivals. Government ministers have promised decisive steps to stop the yen’s surge when required, but there’s been nothing of substance yet.

The Bank of Japan (BoJ) recently boosted its cheap loan scheme, but that failed to meet its objective. “The moves made by the government and the BOJ were sort of token measures,” said Hiroshi Watanabe, senior economist at the Daiwa Institute of Research. “The markets see right through it.”

The country’s economy relies heavily on exports to America and Europe, markets hit hard by the global recession and where the recovery is slow. It’s also unable to call on domestic growth when times are hard, unlike those elsewhere.

Japanese consumers have been more inclined to keep their money under the mattress as the economy becomes locked in a deflationary spiral. People think prices will fall as conditions deteriorate, so rein in spending. Retailers lower prices to try and attract business, which convinces shoppers to believe prices will keep falling, so they postpone purchases again. And so it goes on.

Prices fell again in July, recent data revealed, the 17th month in a row that inflation has fallen. Japan's consumer price index, excluding fresh food, fell 1.1% from the same time last year, heaping more pressure on politicians to act.

The BoJ forecasts consumer prices will begin to rise towards the end of the year to March 2012, but experts fear even this estimate could prove over-optimistic.

Industrialists are also getting increasingly agitated. Osamu Suzuki, chairman of Suzuki Motor, recently told the ruling Democratic Party of Japan (DPJ) “to fight their battle after they implement measures to ensure Japan does not sink”.