A recession like no other
In modern economic history, an equivalent to the prolonged recession in Japan will have few equals, if any. We have analyzed the state of Japan earlier, but in a nutshell, the Japanese economy experienced an asset price bubble, which led to its first lost decade from 1991–2000. This was primarily the handiwork of Japanese banks (MTU) (MFG) (SMFG) lending to non-creditworthy corporations.
While combating the banking crisis, severe strain was experienced on monetary and fiscal policies. To combat the strain on its finances, the Bank of Japan first introduced quantitative easing in March 2001 when it began purchasing JGBs (Japanese government bonds). This was the first ever experiment with quantitative easing.
The Japanese economy was responding positively to the measures when policymakers realized that more would need to be done in the wake of the global financial crisis of 2008. To combat the ill effect of the crisis, the Japanese central bank introduced CME (comprehensive monetary easing) in October 2010.
Abenomics followed CME, after Shinzō Abe became prime minister of Japan in December 2012. This three-pronged approach to reviving the Japanese economy continues in its endeavor even today. However, the strain of prolonged easing on Japan’s central bank is quite visible in the above graph.
Spending remains low
Ray Dalio, founder of Bridgewater Associates, has emphasized the importance of spending for an economy. We explored this in the context of the United States in part 2 of this series.
For Japan, things are no different. Because of the extended poor performance of the economy, which has led to nearly no wage growth, consumer spending has taken a serious hit. In July 2015, consumer spending fell by ~2% from a year ago. This has been a major roadblock in Japan’s path to economic stability.
Impact on Japan-focused mutual funds
Persistent failure in getting Japan back on the growth path has impacted all financial instruments focused on Japan and Japan-focused mutual funds. It violates the popular belief of getting rewarded after being invested for a long term.
To make this analysis more fruitful, we considered those Japan-focused mutual funds that have had a long track record. We shortlisted two funds: the Commonwealth Japan Fund (CNJFX) and the T. Rowe Price Japan Fund (PRJPX). To make our analysis consistent, we considered their movement from the beginning of January 2000, more than a year before the first quantitative easing attempt, until September 22, 2015.
The results are visible in the graph above. In more than 15 years of analysis, neither fund was able to regain its January 2000 level, let alone surpass it. The difference in performance shows the impact of active management of these funds. While FPJAX has returned 1.7% since its inception in December 1991 until August 2015, CNJFX has returned -3.6% since its inception in July 1989 until August 2015.
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