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Robin Geffen Japan comment

While ‘momentum investors’ are pushing into the market, others are more sceptical about the immediate impact of Abenomics.

But while ‘momentum investors’ are pushing into the market, others are more sceptical about the immediate impact of Abenomics.

Neptune chief executive Robin Geffen believes that while Japan is on the road to recovery, it is a complicated healing process that investors would be wise to take stock of before making the plunge.

“No one ever said curing Japan’s two decades-old malaise would be easy,” he concedes. “But it’s also a good thing – it means Japan can still enjoy capital inflows if the experiment continues to work.”

Geffen’s view is that rather than the current bout of quantitative easing and the Government Pension Investment Fund’s re-allocation being the answer, it is just the acceleration zone in the economic marathon.

“The move we saw following these announcements was just one step along the way. Our view is that Japan has no choice but to continue the reforms it has started, and these reforms are still in the early stages,” he explains.

He cites the BoJ’s reference in October to the Bank of England’s 40% gilt holding compared to its own 20% holding in Japanese government bonds as indication that the BoJ will go even further, leading to long-term Japanese market growth.

“The impact of the reforms and policy changes on underlying asset prices is not yet anywhere near reflected in current stock prices. We believe we are very early on in a multi-year bull market in Japan.”

While Geffen believes that delaying the next stage of consumption tax hike – a rise from 8% to 10% scheduled for October 2015 – would enhance the prospect of burying Japan’s deflation years, it could also bring negative political implications into Abe’s vision.

“It would publically embarrass key officials there were Abe to postpone it,” he said. “However, he has two options to square the circle.

“The first is to implement a supplementary budget in the form of tax benefit handouts, which would in particular support lower income consumers as the consumption tax hike hits. This would neutralise the fiscal impact on the economy in 2015, or at least smooth it over 2015 and 2016.

“The second option is more radical but has risen in probability during the past week. This would be to call a snap election to be held before the end of the year, in order to get a public mandate to postpone the tax hike – thereby allowing the Ministry of Finance to save face.”

With everything taken into account, Geffen’s overall view is that with politics and the economy being so intertwined, investors should pay as much attention to Japanese government news as they do the financial pages.

“Economic imperatives have embedded themselves into the Japanese political system,” he concluded. “Investors will be rewarded for aligning themselves accordingly.”

Part of the Mark Allen Group.