Few fund managers have experienced the gut-wrenching turns of the Japanese stock market like Shuhei Abe. He founded Sparx Asset Management back in 1989 -- as stocks hit all-time highs -- and then watched the market's death spiral. It's still down 70% from the bubbly peak. But Abe, who manages about $3.7 billion, professes to be "absolutely bullish" about the Japanese economy's long-term growth prospects. Tokyo Bureau Chief Brian Bremner recently spoke with Abe, an amateur folk guitarist as well as a money pro, to find out why he's so gung ho.
What's behind the 40% rally in the Nikkei since April of this year?
We should first look at the decline before then and the policies of the [Prime Minister Junichiro] Koizumi Administration that were implemented in April, 2002. He employed two basic principles: One is fiscal discipline. Second, he advocated bank restructuring. Koizumi said that by 2004 the banks' equity portfolio should be lower than their core capital. So banks engaged in a kind of forced liquidation. What happened, though, is that [equity prices] became reasonable. Undervalued market conditions were created.
With banks no longer majority shareholders at many companies, how will corporate governance change?
Companies are changing. Now, Corporate Japan isn't owned by banks. Until the mid-1990s, over 50% of the equities of Corporate Japan were owned by banks through the cross-holdings networks. It is now only one-quarter. Now shareholders such as pension funds and individual owners [who] care about corporate performance [have a larger voice].
Is Corporate Japan delivering on profits?
The last peak [year] of profits was 1989. And the estimated earnings growth for fiscal 2004 is 65% above what the rate of earnings growth was in 1989. Profits are increasing, yet the market is still 70% lower than the 1989 peak. [Profit growth] isn't coming from an increase in sales but from cost restructuring.
What sectors do you like?
I'm quite encouraged by the banking sector. In 1987 it represented 24% of the total market cap of all Japanese stocks. In April it amounted to only 2.3%. The nonperforming-loan problem actually peaked in 1998 and has since been declining. The banks have been employing stricter measures to classify loans. If they meet their expected numbers in September [half-year fiscal year results], the world will start to be impressed.
What other trends are working in Japan's favor?
Japan is already doing very well with China. If you look at our [bilateral] trade, it is pretty balanced, and our total trade is expanding rapidly. In the U.S., the trade deficit with China is enormous. The U.S. is just importing. Japan is both exporting and importing, and it's creating a new model of growth. The second trend is digitalization. If this technology can be applied to consumer goods at the household level, that will be big. Big players such as Matsushita [Electric Industrial Co.] will benefit. The stronger parts of Japan -- consumer electronics and manufacturers -- are revitalizing their strength.
Top Japanese auto makers are also on a tear. Why?
The Japanese auto sector is entering a new phase of growth. What is happening today is that Japanese auto makers are growing rapidly outside of Japan and increasing their market share. Toyota is [the leading] beneficiary by far, and though Nissan is growing from a smaller base, its strategy is interesting.