JOHCM’s Japan stars: why Abenomics' third arrow is irrelevant

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The emphasis placed on structural reforms in the Japanese economy is misguided and overlooks the achievements the Japanese market has already made under Abe.

That is the view of Euro Stars AAA-rated managers Scott McGlashan (pictured) and Ruth Nash, who co-run the $744 million JOHCM Japan fund.

In their latest market update, the veteran Japan equity duo criticised the weight of importance place on the so-called ‘third arrow’ of Abenomics being a success.

Commentators and fund managers have been outspoken about the need for widespread structural reform to allow stimulus measures under Prime Minister Abe to have a longer-term, positive impact.

This was particularly evident in the run-up to the Upper House elections, which Abe won in July of this year. However, Nash and McGlashan have sought to downplay the significance of this step.

‘We believe that the focus on structural reforms is misplaced: the first two arrows of Abenomics have done more than enough to ensure an economic recovery,’ the duo said.

‘And the rethinking of the consumption tax hike reflects Abe’s concern that it might kill the nascent economic recovery; it demonstrates pragmatism, not indecision.’

The co-managers, who have seen assets under management more than double since Abe re-assumed office in December 2012, said the corporate climate is already responding to positive stimulus measures.

‘The market is cheap, government policy is supportive and the prospect of revenue growth means that corporate Japan’s ruthless efficiency drive over the past few years will produce spectacular earnings growth,’ the duo said.

At the end of July, the duo was running a slight underweight to manufacturing – the largest sector in the Topix index. Here they have eight percentage points less than the benchmark allocation of 51.8%.

Elsewhere in the fund, Nash and McGlashan currently hold minor overweights in finance and insurance (+5%), as well as transport (+3.5%) and real estate (+3%).

The JOHCM Japan A JPY fund has returned 53.43% in the three years to the end of July 2013. This compares to a rise of 42.56% by the Topix TR over the same period.