Japan’s VAT hike unlikely to dampen equities appetite

05 May 2014   Category: News, Asia, Global, Japan   By Maya Ando

Japan’s increase in its rate of VAT is unlikely to dampen investors’ appetite for local equities, due to other economic stimulus measures already in place, according to one prominent fund manager,

Japanese stocks have seen a sustained recovery in the 18 months following the implementation of monetary policy by Prime Minister Shinzo Abe designed to stimulate the local economy.

However, investors have expressed concern whether stock prices can remain strong amid an increase in VAT from 3% to 8%, which will likely impact on consumer spending and corporate earnings.

Osamu Tokuno, chief portfolio manager of Japanese growth equity at Invesco Perpetual, said that investors have not forgotten about the negative effect of the country’s last VAT hike back in 1997. Still, Mr. Tokuno forecast that other stimuli brought about through Mr. Abe’s policy of ‘Abenomics’ was enough to offset the impact of the indirect tax increase.

“I am optimistic that the stimulus package should be enough to offset the negative impact of the VAT hike this time. The Japanese domestic economy is in good shape and consumption has been very strong due to the wealth effect coming from equities and other foreign currency denominated financial products. Also, people have started to be granted wage increases of 2% to 3%, something which has not been seen for a long time,” he said.

In addition to investors’ increased appetite for local equities, strong demand among Japanese small-to-medium sized companies (SMEs) has become a major growth driver for the economy. According to The Ministry of Economy, Trade and Industry, there are 4.69 million SMEs in Japan, constituting 99.7% of all enterprises and accounting for 70% of all employment. With the growth dynamics of SMEs, experienced investors are generating returns from trends such as industrial consolidation and globalisation.

Mr. Tokuno explained: “The government led by Prime Minister Shinzo Abe has been trying to deregulate many areas in order to promote more competition or help create new businesses, such as in healthcare, energy, agriculture and financials. In general, SMEs tend to be newcomers, not traditional players, and they also tend to be challengers, not defenders.”

He added that a significant number of companies were being overlooked, despite being good investment opportunities in light of their favourable growth prospects.

Sectors highlighted by Invesco Perpetual included mobile broadband, which is experiencing growth in Japan on the back of rising demand for online TV programmes and movies, ebooks and video games.

Valuations for both small-cap and large-cap stocks are equally attractive, trading at 14 to 15 times 12-month forward earnings, despite the fact that earnings are expected to grow by another 10% to 15% for fiscal year 2014, said Mr. Tokuno.