Would you please comment on the progress of the government’s structural reform program?
We believe the structural reform program is progressing well. Over the last few years, the LDP’s administration has implemented scores of structural reforms affecting the tax code, the labor market, and corporate governance regulations.
Recently, the government has been discussing the introduction of an element of meritocracy into the market for white-collar employment in an effort to improve labor productivity. Proposals under consideration include the idea that highly skilled workers be paid on the basis of work produced rather than hours worked.
New revisions to the corporate governance code are also being discussed. Under the new guidelines, companies would have to publish a management succession plan, meet diversity criteria in their boardrooms and justify non-strategic, cross-holdings between companies.
How might the recent strengthening of the yen impact the portfolio?
Historically, the Fund has been resilient during adverse currency environments. For example, during the first half of 2016, when the yen rose sharply from 120 to 100, the Fund fell less than half as much as the overall Japanese stock market. We believe this outperformance illustrates how stock selection and an emphasis on high-quality companies can mitigate the effects of a stronger yen. We believe we have an exceptional portfolio of high-quality companies in the Fund that can continue to grow and gain market share regardless of currency fluctuations.
Would you discuss the Fund’s valuation levels?
We are comfortable with the valuation levels for the Fund relative to the market. Our quality investment approach means that the Fund’s price-to-earnings ratio (P/E) tends to be higher than the market’s, but we believe the premium is justified. It is important to note that to a degree, the reported P/E multiple for the Fund is somewhat elevated as valuations for some stocks are being artificially inflated by mandatory goodwill amortization. Additionally, the Fund does not only invest in growth stocks – it also holds several low P/E, “value” stocks such as Mitsubishi Corp. and Sumitomo Mitsui Financial Group.
Why should U.S. investors consider investing in Japanese equities?
In our opinion, investing in Japanese equities, and in the Japan Fund specifically, provides the opportunity to invest in some of the most globally competitive companies in the world, operating in some of the fastest growing markets. For example, Fund holdings such as Nidec Corp., a comprehensive motor manufacturer; Keyence Corp., an industrial automation products manufacturer, Recruit Holdings, a human resources services company, and Unicharm Corp., a diaper manufacturer, are all global leaders in their
respective industries. Because many of the Fund’s holdings, while headquartered in Japan, are truly international, investors in the Fund can gain exposure to fast-growing developing countries, such as China and India, but with better transparency and corporate governance regulations than if they were to invest in these markets directly.
Additionally, we believe many of the Fund’s holdings such as Unicharm, Keyence, Kao Corp., a chemical and cosmetics company and SoftBank Group Corp., a telecom, and e-commerce conglomerate, are relatively insulated from the economic cycle and should be able to continue to grow regardless of the rate of economic growth in Japan.