JAPAN - Schroder Investment Management believes that now is the worst time to give up on Japan.
Although the Japanese economy has begun to recuperate, growth remains anaemic and looks set to continue in this vein as Japan’s largest export market – the US – falters.
But at a corporate level, Japanese companies have started to restructure in a bid to shed old practices that have been depressing profits for a decade, according to the analysis.
Denis Clough, Schroders’ head of Asian equities, said: “We believe that now would be the worst time to give up on Japan. When investors do gain confidence in the global recovery, the bounce in this market will be strong – and not one that investors will want to watch from the sidelines. “
Schroders thinks that the benefits of this restructuring will emerge in profit growth this year - leaving Japanese companies in a more competitive position when the global recovery does kick in.
“Investors need to look at those companies that have implemented tough but necessary changes in order to find the best rewards. The focus should be on companies that have cut their costs and repaired their balance sheets,” said Schroders.
The very high level of borrowing amongst Japanese companies has been at the root of many of Japan’s problems, with many banks knee-deep in non-performing loans.
In the past, these banks have relied on the government to prop them up in difficult times. But regulators are now opting for a tougher stance, meaning that some banks, and therefore their weak corporate borrowers, could be allowed to fail.
In the long term, this elimination of inefficient businesses can only be positive, said Schroders.
“Japan’s stock market is valued at a level that was last seen in the 1970s; the bubble in Japanese share prices in the ‘80s and ‘90s has now completely deflated.
“Even if economic growth remains subdued, the undercurrent of improving efficiency at corporate level should mean that companies will continue to grow earnings.”
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