Mark O’Friel on Investing in Japan

Mark O’Friel is the Managing Partner of MOF Capital, an alternative investment fund focused on investments in Japan and China.

This conversation was recorded in 2013.

The Manual of Ideas: When we last spoke in November 2012, you were pretty bullish on Japan. Given the approximate 60% increase in the major Japanese equity indices – Nikkei 225 and TOPIX – since then (approximately 40% increase in U.S. dollar terms), do you still see value in Japan?

Mark O’Friel: Agreed that quite a lot has happened in a year. I am not sure whether Prime Minister Abe could have scripted the short term much better. He announced his “three arrows” policy soon after he took office: fiscal stimulus, monetary easing and deregulation. All had been tried before with limited success. However the combination as well as the appointment of an ally, Kuroda, at the Bank of Japan helped convince investors that the policies would gain traction. Asset markets responded with a broad based rally in equities and a dramatic move in the yen. But we have all seen parts of this movie before. There have been something like 15 stimulus packages since 1990 and many have resulted in short term moves in equity markets.

The broad-based rally can continue if inflation targeting stays on track and if the austerity move of raising the consumption tax does not overwhelm the benefits of fiscal stimulus. “Quantitative easing” (QE) is still an experiment, both in Japan and in the U.S. Inflation is still not near the 2% target and the JGB ten year is at 60 basis points. It will take discipline to stay the course with monetary policy and not tighten prematurely as has happened with previous regimes.

The third arrow of deregulation which might lead to more sustained as well as more idiosyncratic moves among stocks and sectors is the biggest question mark of Abe’s plan. What structural reform will actually take place? Much of the talk now is about objectives and not concrete actions. Which industries and which companies will most benefit by reform? What companies are least prepared to deal with “challenge, openness and innovation”?

The fast move of the spring was driven by broad based market moves. Large cap traditional exporters moved with the yen depreciation and the market. There are still opportunities in small and mid cap stocks. A large number of net cash or close to net cash companies remain.

The question is when will top line demand return. Bank lending to smaller companies shows little growth year over year.

MOI: Do the “Abenomics” policies portend an uptick in M&A and perhaps activism in Japan?

Members, log in below to access the restricted content.

Not a member?

Thank you for your interest.  Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form:

First name:

Last name:

Email address:

City / state / country:

Company:

How did you hear about MOI Global? Select Member referral Staff This website Media / Internet Other

If referral, please provide member's name:

Which of the following applies most closely to you? Select Investment Firm - Head Investment Firm - Analyst or PM Institutional Allocator - Firm C-Level Executive Institutional Allocator - Firm Employee Family Office - Head or Co-Owner Family Office - Employee Non-Investment Firm - C-Level Executive Non-Investment Firm - Employee Other

How do you hope to add value to the community?

Leave this field empty if you're human: