An earlier than expected shift by the BOJ towards a looser monetary policy has been well received not only due to the resulting yen weakness but also as it appears this shift was induced by a close collaboration with the new DPJ administration, whom many sceptics had considered would not be able to develop a close understanding with the BOJ at such an early stage of their tenure. The immediate impact is that Japanese cyclicals and exporters have seen higher share prices which may well continue as investors become more convinced that earnings will now benefit more decisively from the global cyclical recovery. The stockmarket had become very oversold due to a confluence of unusual selling in November in that foreigners, domestic institutions and retail investors had all turned sellers albeit for differing reasons. Market expectations have been further improved by the possible lower than expected share offering sizes from certain Japanese banks where anxiety had weighed heavily on market sentiment.

That said we do not share the market consensus that a significantly weaker yen will cure the ongoing problem of the lack of nominal GDP growth over the last 15 years and whilst we consider further moves by the BOJ as inevitable, the focus will be geared towards achieving a definitive inflation target. The simple reason for this view is that over the last 15 years the economy has seen short-lived improvements due to a combination of a weaker yen and global cyclical recovery but the impact has proved unsurprisingly unsustainable. Investment opportunities continue to look more enticing amongst more domestic companies where valuations remain very cheap and where industry consolidation and restructuring merits continue to be overlooked. Whilst many embittered investors will say they heard this all before, we believe that the domestic outlook will improve.

Our recent trip to Japan refreshingly found corporate managements in a determined mood to improve profitability without simply relying on a global upturn. The ongoing reluctance by banks to materially raise corporate lending has acted as a further wake-up call for many corporates. On a positive note too we found some domestic companies planning to reduce capacity by 30% which will transform industry wide pricing and profitability. The long held view that Japan is a value trap needs to be tempered by the imminent realisation that the forthcoming IFRS changes will result not only in a greater appreciation of the value but more encouragingly that certain managements intend to help realise this value. Restructuring at smaller companies, especially the more family-owned, remains aggressive and valuations will come as a positive surprise over the next few months.

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