He also noted that Japan is experiencing political stability under Prime Minister Shinzo Abe, now in his second term. In addition, the government has committed itself to funding and implementing a full-scale reconstruction that will strengthen the country’s infrastructure following the 2011 Fukushima earthquake and tsunami.
“We’re at the start of a new super cycle,” Abe said. “From 2008 through 2012 was a tough time for Japan. The yen was stronger. Unlike other central banks, Japan’s central bank didn’t do anything compared [with the stimulus programs] of the U.S. and other central banks.”
“The real challenge for Japan is where the markets go from here,” Abe said. He forecast that Japan’s growth rate will reach the highest level over the next two years and that the real force of the reconstruction effort is expected to take place over the next three to five years, “when earnings per share of companies are expected to grow by 38% or more.”
Meanwhile, domestic car production and Japanese housing starts are high, and Japanese consumption is expected to recover as working hours pick up. Savings are currently at historic highs for Japanese citizens.
Masakazu Takeda, portfolio manager of the large-cap Hennessy Japan Fund since 2006, outlined the criteria for investing in the fund, which owns about 20 stocks. He said he looks for simple, easy-to-understand companies that can grow regardless of economic conditions. “We don’t like companies with a lot of debt,” he said.
These businesses must also have a durable competitive advantage and sustainable above-average returns on equity and earnings growth. His favored names must also consistently generate ample cash flow and have smart management.
In sum, he said, “Our portfolio consists of companies we believe are going to be the next wave of emerging global businesses out of Japan.”
The Hennessy Group, with $3.5 billion in assets under management, consists of 16 no-load equity mutual funds, including the large-cap and small-cap Japan funds, which each have $26 million under management.