P&I: Let's move on, out of Europe now and out of the United States, and on to Japan. Japan has been the great conundrum for international investors for 10 years now. When will Japan pick itself out of its doldrums? What are the prospects for investing in Japan?
MR. THOMSON: I think the Japanese are at what you might call "the problem recognition stage," which is an important point because I do not think, for example, the French are at the problem recognition stage or the Italians.
The Japanese have impressive plans for deregulation and so forth, and they will achieve some of them. I think the financial sector is sorting itself out slowly. It is very easy to write off the Japanese, but they have picked themselves up after being "nuked" twice, two oil shocks, the Nixon shock, etc., but they will transfer plants to Southeast Asia. At the same time, a lot of the high-tech stuff will stay in Japan and I think they are in the process of picking themselves up. We expect the economy to grow a little faster.
P&I: Are you overweighted in Japan?
MR. THOMSON: We are overweighted in Japan.
MR. BUCKLEY: You are right; Japan has been a big disappointment for fund managers this year. It has been a pretty unpleasant experience for anyone unhedged investing in Japan.
What has gone wrong? Obviously, confidence in the Japanese recovery has been shattered, and I guess that is best illustrated by the fact that local institutional investors think yields of 2.2% on 10-year JGBs (Japan government bonds) represent good value. The core of the problem is that Japan has attempted to reflate its economy via fiscal and monetary stimulus, whereas what is really needed is deregulation and supply-side reform. That has been slow in coming and to do it is going to require a very strong political will and very strong leadership. We are not sure that is there.
Without those things, without a focus on profits, on dividends and on shareholder value, without that we do not see a bull market in Japanese equities. We are neutral on Japanese equities.
MR. SNIJDERS: We are getting slowly more positive but very, very slowly because, indeed, some of the problems were rather structural in Japan. On the positive side, if you look at what happened in corporations, there is very strong emphasis on how to increase the business. And I think also now we will see a slow appreciation of the yen again, because even that underlines the position of the Japanese economy. So, slowly more positive but not booming.
MR. MCFARLANE: For us everything changed in the middle of 1995. The government stopped trying to destroy its own economy. I think they are facing reality and began to face it from the middle of last year onward with respect to the yen and interest rates and bank profits and so on.
Our view would be that from then on it became safe to go back into the water in Japan. Over the last 13 years, our fund is 800 basis points ahead on a compound annual basis, and the reason for that has been twofold: (1) We have been willing completely to underweight or avoid sectors of the market and (2) we focus much more on stock selection in Japan.
Our feeling about Japan now is that it is one of the rather more interesting places in the world where you can put capital into good businesses. People are having to change their distribution systems, they are having to be competitive in ways they never imagined.
In all this period when the U.S. market has improved and the U.S. economy has improved, I did not notice anybody coming out to take advantage of Sony's weakness or Hitachi's weakness or Toyota's weakness, and so forth.
And if this is where Japan is after six years of an extraordinarily difficult environment, I think it would be the unwise investor who has a zero weighting in Japan going forward. (contd.)