After two decades of economic malaise, Japan is well into a recovery touching every segment of the society, according to Hennessy Funds, the San Francisco-based mutual fund family, which has two vehicles dedicated to the country.
Neil Hennessy, the firm’s portfolio manager and chief investment officer, gave an overview of Japan’s comeback at a press briefing in New York on Wednesday. Hennessy’s large-cap Japan fund, mainly an institutional product, is up approximately 16% in dollar terms for the year, and the small-cap fund was up 17% year to date. The two portfolios are in the top ranks of Japanese funds at both Morningstar and Lipper.
While the U.S. financial crisis began in 2008, Japan began suffering its crisis 20 years ago. “If you only looked at the negatives, which are many,” Hennessy said, “you would not invest in Japan.” But he said there are now a lot of positive signs, many of them coming from the country’s less-inflated currency.
“Everybody is concentrating on the yen because of its move to parity with the dollar,” Hennessy said. “Structurally, things have been changing in Japan for the last three to 15 years. Japan is entering a true bull market now, which has a lot to do with quantitative easing by Japan’s Central Bank. People continue to say we’ve seen this in the past. We did this and nothing happened. I’m here to say that a lot is happening.”
He said that the country’s financial system is in great shape. “Corporations are in great shape. Cash flows are at historical highs, tourism is on the rise, and the government truly wants companies and individuals to prosper.”
He also mentioned that companies in Japan have been slimming down and cutting costs, as well as holding on to cash like their U.S. counterparts.
Currency: The Missing Piece
“The only piece of the puzzle that was missing was a weak currency. Now that the yen has weakened to this extent, corporate profits in Japan over the next 12 months should increase somewhere between 40% to 50%,” he predicted.
Shuhei Abe, president and CIO of the Tokyo-based SPARX Group, the sub-advisor of the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund, gave an overview of the investing landscape in Japan. Abe founded the SPARX Group in 1989 and oversees $6 billion in assets there.
He said he believes that Japan will continue its upward trend because of the weaker yen and that this will bolster the earnings of Japanese companies, whose previous focus has been on cost reduction and growth strategies in overseas markets.