Merryn Somerset-Webb

A slow dawn but not a false one

Merryn Somerset Webb says Japan is still a good bet for the medium term, despite the disappointments of 2006

For fund managers who specialised in Japan, 2005 was a fantastic year. After more than a decade of dealing with a market in the doldrums they suddenly found themselves in the middle of a boom: stocks were rising fast, gurus around the world were tipping Japan as their favourite market and Japanese-themed hedge funds were springing up everywhere. Money poured in and the managers — who had looked resentfully at the fortunes being made in US and UK markets for many years — started to live the dream: they opened offices in St James and rushed to buy the cars, boats and houses that the City thinks go with making real money. By the end of the year the benchmark index was up around  40 per cent and they were all rolling in cash.

Anyone with any history in Japan could have predicted what happened next. In 2006, as other markets clocked up another great year, the Japanese market rose a pathetic 4 per cent — and that only because a few big exporters (Toyota, Honda, Canon, Nintendo) did brilliantly; take them out of the mix and the average stock actually fell by about 20 per cent. As for the hedge funds that looked like can’t-lose bets in 2005, they all fell between 5 and 20 per cent. I can’t find a single one that made its investors a real profit all year. The result? Money pouring out again, and all over Mayfair failing funds quietly shutting their doors.

So what went wrong? In 2005 all the elements for success seemed in place. The economy was out of recession; exports had been strong; capital expenditure was rising rapidly as Japanese companies began to expand capacity for the first time in years.

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