We continue to monitor the progress of Japan under Prime Minister Shinzo Abe. In essence, his “Abenomics” reforms aim to stimulate growth through three primary areas, referred to as the “three arrows.”

1. Large increases in the money supply. There have been significant increases in the money supply. To get a sense of the scale of Japan’s quantitative easing (QE) initiatives, the total U.S. economy has a gross domestic product of roughly $16 trillion and the Federal Reserve has been injecting $85 billion into the money supply on a monthly basis via QE. In contrast, Japan’s total GDP amounts to $6 trillion, but the Bank of Japan has been injecting a relatively much larger $70 billion a month into the domestic economy via QE.
   
2. Large increases in fiscal stimulus. The Japanese government plans to further increase deficit spending by 10 trillion yen (2% total increase) as part of Abe’s first major policy initiative to boost growth. (Source: Bloomberg, January 2013).
   
3. Structural reforms. Economic reforms (such as increasing the number of female workers, loosening of labor regulations, and raising the retirement age) are wide-ranging and likely to be the most difficult to achieve because of the politics and special interests involved in each decision.

To date, progress has been mixed in these areas, presenting cause for optimism as well as concern, over the ultimate success or failure of Abenomics. Yet changes have been significant enough that they are worth watching in the coming months and years.
Causes for optimism   

The Tokyo Stock Price Index measures stock prices on the Tokyo Stock Exchange. It is believed to be more representative of the Japanese stock markets than the Nikkei Index because it includes all the largest companies, currently 1600 first section first section companies.

The Nikkei Index is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.

Causes For Concern   

   
There is still limited evidence to suggest that Japanese consumers have started to “loosen their purse strings” in a meaningful way.

As bottom-up (stock-by-stock) investors, we believe that a successful company will succeed on the strength of its management, the competitiveness of its productive asset base, the quality of its balance sheet, and the structure of its global market positioning. The location of the company’s domicile is less important to us than its real underlying risk exposures. That said, we remain alert to the opportunities that such changes in Japan could represent to strong companies with favorable valuations within our value universe. We continue to keep a close eye on these macroeconomic developments as we research individual companies domiciled in Japan.

As of the end of the third quarter of 2013, our Global Value Fund portfolio had a slightly overweight position in Japan and our International Value Equity Fund portfolio was slightly underweight in Japan. On a stock-by-stock basis, we have trimmed back Japanese names that approached our target prices. We are also seeking new stock purchases that have a target price that we consider to be at least 50% ahead of current price and offer what we view as 20% downside protection to attempt to provide a margin of safety.

 

Todd Bassion is vice president at Delaware Investments and co-manages the Delaware Global Value and Delaware International Value Equity mutual funds.