James
Gard:
So,
Japan
is
making
headlines
again
after
raising
interest
rates
for
the
first
time
in
17
years.
Here
to
discuss
the
market
reaction
after
this
is
Sam
Perry.
He
is
the
Senior
Investment
Manager
at
Pictet
Asset
Management.
Welcome,
Sam.
Sam
Perry:
Thank
you.
Gard:
So,
the
yen
fell
after
the
announcement
and
policymakers
are
talking
about
supporting
the
currency.
Has
this
market
reaction
surprised
you?
Perry:
In
a
way,
no,
because
when
we
had
the
change
to
negative
interest
rate
policy
back
in
2006,
everyone
expected
the
yen
to
weaken
and
instead
it
strengthened.
I
think
this
is
again
like
2006
had
been
so
well
flagged
by
the
Bank
of
Japan
that
there
was
never
going
to
be
that
much
market
reaction.
In
terms
of
the
weakening,
it
hasn’t
moved
very
much.
It’s
a
couple
of
percent.
While
at
the
same
time,
if
you
try
and
look
at
the
fundamental
value
for
the
currency,
always
a
tricky
job,
but
that
looks
more
like
sort
of
120.
One
of
my
colleagues
at
Pictet,
he
reckons
108.
So,
will
we
get
to
a
strengthening
position?
Probably
yes,
but
we
may
just
have
to
wait
a
little
bit.
Gard:
Sure.
That
may
take
time
really.
But
in
terms
of
the
inflation
makeup
and
the
nature
of
inflation
in
Japan,
you’re
a
believer
that
it’s
sustainable
in
Japan.
How
does
that
back
the
kind
of
longer-term
investment
case
for
investing
in
Japan?
Perry:
The
short
answer
still
needs
us
to
go
back
into
the
80s
and
the
collapse
of
the
bubble
and
then
Japan’s
desperate
need
to
deleverage.
Roll
that
through,
we
start
seeing
deflation
come
in
and
they’re
desperate
to
get
rid
of
all
that
leverage
again
and
build
up
cash
because
it’s
going
to
give
them
the
real
return
risk-free.
This
is
the
simplest
thing
to
do.
Get
rid
of
the
gearing,
have
cash.
The
problem
then
is
that
that
embeds
deflation
even
further.
But
that
then
requires
you
to
hold
more
cash
because
it’s
still
giving
that
real
return
risk-free.
There’s
no
incentive
to
invest.
So,
we
have
this
massive
pile
of
cash
sitting
on
corporate
balance
sheets.
So,
what’s
the
point
of
inflation?
The
point
of
inflation
and
the
point
of
all
of
the
Bank
of
Japan’s
efforts
since
2012-2013
has
been
to
instil
this
inflationary
attitude
to
really
kind
of
get
that
mentality
back
into
corporate
Japan
because
at
that
point,
the
cash
is
a
wasting
asset.
So,
once
we’ve
got
that
position,
then
all
of
a
sudden,
corporate
boards
are
looking
around
thinking,
we’ve
got
to
do
something
with
our
cash,
we
have
to
invest.
So
that’s
really
the
story
for
Japan.
We’re
starting
a
huge,
potentially
huge
investment
cycle
in
Japan
as
all
of
this
cash
is
flushed
out,
is
handed
back
to
shareholders,
gets
spent
onto
M&A
and
we
can
see
this
happening
now
starts
feeding
into
investment
and
capital
expenditure.
Gard:
Sure.
So,
we’re
kind
of
at
the
beginning
of
the
cycle
in
terms
of,
you
know…
Perry:
It
seems
strange.
I’ve
been
talking
about
this
as
a
prospect
for
nearly
10
years
ever
since
yield
curve
control
and
qualitative
and
quantitative
easing
was
enacted
by
the
Bank
of
Japan.
But
yeah,
I
think
now
we’ve
kind
of
hit
the
starting
blocks.
Gard:
Sure.
And
just
quickly,
I
mean,
do
you
have
any
kind
of
examples
of
leaders
in
this
field?
Perry:
One
of
the
great
advantages
for
Japan
in
this
scenario
is
that
it
still
has
that
significant
industrial
base.
So,
we’re
not
looking
so
much
at
a
service
economy
as
compared,
let’s
say,
to
the
U.S.
as
we
are
looking
at
a
much
more
industrial
economy.
So
that
CapEx
spend
is
really
going
to
flow
through.
And
you’ve
got
the
world’s
leaders
in
robotics,
the
world’s
leaders
in
factory
automation,
they’re
all
sitting
in
Japan,
FANUC,
which
makes
the
robots
or
SMC,
which
makes
pneumatic
actuators
for
factory
lines,
they’re
all
there,
and
that’s
where
we
expect
to
see
the
orders
start
to
flow.
Gard:
Sure.
So,
interest
in
Japan
seems
to
be
at
a
high,
but
you’re
saying
that
there
is
still
a
bit
of
a
way
to
go
in
terms
of
inflows.
Can
you
explain
why
there’s
a
mismatch
and
what
would
need
to
happen
to
change
that?
Perry:
Yeah,
you’re
absolutely
right.
There’s
clearly
a
lot
of
interest.
I
mean
whether
it
be
looking
at
the
pages
in
the
FT
or
whether
it
be
looking
at
just
the
number
of
meetings
that
we’re
–
meeting
requests
we’re
getting
from
clients
and
prospective
clients,
there
is
a
lot
of
interest.
But
you’re
right,
it
hasn’t
translated
yet
into
money
flowing
into
Japan.
There
was
a
brief
period
of
excitement
around
this
time
last
year
when
it
seemed
to
be
that
the
flows
are
picking
back
up.
They
were,
that’s
true,
but
from,
number
one,
a
very,
very
low
base
and
number
two,
even
compared
to
the
flows
that
we
saw
2012-2013
after
the
start
of
Abenomics
and
QQE,
it’s
tiny
proportion
of
that
and
of
course
the
market
is
four
times
bigger.
So,
the
overall
impact
is
minimal.
So
how
do
we
explain
it?
I
think
that
there
are
a
couple
of
things.
The
first
is
that
imagine
that
you
are
running
a
global
pension
fund
balanced
mandate.
Then
you’ve
got
a
portion
which
is
your
equity
portion.
Within
that
equity
portion
then,
what,
70%
is
going
to
be
the
U.S.?
Where
is
everyone’s
focus?
It’s
on
the
Magnificent
Seven,
it’s
on
AI,
it’s
on
whatever.
So
how
much
then
do
you
have
left
for
Japan?
Well,
it’s
a
pretty
small
part
of
the
MSCI
World
these
days.
I
mean
if
you
have
an
equity
mandate,
it’s
even
smaller.
So,
what
do
you
need
to
really
feel
convinced?
I
think
that
one
of
the
problems
ironically
is
the
success.
We
have
had
such
a
strong
market
performance
over
the
last,
say,
18
months
that
people
are
saying
it’s
too
late,
we
can’t
come
in.
And
yet,
at
the
same
time,
we
can’t
see
foreign
money
coming
in.
Whether
you
look
at
the
assets
under
management
of
the
ETFs
which
focus
on
Japan
or
look
at
active
managers
which
focus
on
Japan,
it’s
still
very
hard
to
see
signs
of
anybody
really
pushing
money
in.
So,
then
we
can
also
look
at
the
domestic
investors.
Mr.
and
Mrs.
Watanabe,
the
sort
of
every
man
and
every
woman
on
the
Japanese
street,
the
Prime
Minister,
Kishida,
wants
to
get
their
allocation
to
equities
to
double
what
it
is
at
the
moment.
And
he
has
enacted
a
series
of
reforms
to
the
Nippon
ISA
which
is
modelled
after
our
own
ISA.
And
that
has
worked
in
order
to
get
money
in
except
that
money
has
then
promptly
flowed
back
out
again
to,
yes,
the
Magnificent
Seven
and
to
U.S.
trackers
and
so
forth.
So,
we’ve
still
got,
I
think,
a
measure
of
people
looking
at
Japan
and
think,
it’s
gone
up
so
much,
it
can’t
be
there.
And
yet,
the
market
has
gone
up
four
times
since
2012,
but
that’s
all
been
earnings
growth.
There’s
been
no
change
in
valuations.
So,
there’s
still
a
huge
amount
of
upside
left.
Given
the
growth
that
we
expect
to
see
is
this
cash
on
the
corporate
balance
sheet
has
flushed
out
into
investment,
given
that
you
can
get
a
higher
yield
in
topics,
and
you
can
on
the
S&P,
yeah,
we
think
that
there’s
a
lot
of
upside
left,
particularly
as
people
come
to
understand
this
macroeconomic
story
of
how
inflation
is
actually
real
positive
in
Japan.
Gard:
Right.
Yeah.
I’m
convinced
now.
But
in
terms
of
passive
versus
active,
Japan
has
always
been
a
very
fertile
ground
for
active
investors.
Can
you
make
the
case
for
active
investing
over
passive
investing,
especially
with
markets’
highs?
Perry:
Yeah.
So,
I
mean,
there
are
a
couple
of
points.
A
lot
of
people
look
towards
the
big
ETFs
as
a
simple
way
to
invest.
The
problem
is
that
the
big
ETFs
largely
domiciled
in
the
U.S.
Then
they’re
operating
out
of
ours
of
the
Tokyo
market.
Now
that
comes
with
a
cost.
If
you’re
going
to
provide
that
liquidity,
that
comes
with
the
cost.
So,
yes,
the
actual
fee
is
very
low.
But
your
performance,
your
returns
are
going
to
get
hit
because
of
the
extra
cost
to
providing
the
liquidity.
So,
you
got
to
bear
that
in
mind.
Trackers,
I
would
say,
is
probably
a
better
option
for
a
European
or
a
U.S.
investor.
Use
trackers
rather
than
ETFs.
Less
convenient
for
you
perhaps,
but
at
least
you’re
not
paying
that
liquidity
cost.
However,
you’re
still
guaranteed
a
slight
negative
return
every
time
So,
yes,
I
mean,
I
suppose
I
got
us
taught
my
own
book.
Yeah,
I
got
to
say
you
should
go
active.
And
I
think
that’s
where
you
can
get
the
real
returns
and
there
are
still
–
Japan
is
a
terrifically
deep
market.
It’s
very,
very
liquid,
very
deep
and
there’s
still
lots
of
opportunities
there.
Gard:
Brilliant.
Okay.
I’m
still
excited
about
Japan.
So,
hopefully,
the
market
returns
continue
to
impress.
So,
thanks
for
your
time,
Sam.
For
Morningstar,
I’m
James
Gard.
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