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Q4 2018 Commentary

Market summary and Performance Review

The Japanese equity market reflected the deterioration in global sentiment, and ended the quarter down 17.6%. Weakness was particularly concentrated in October and late December, which coincided with periods of yen strength as the currency continued to be viewed as a safe-haven at times of increased uncertainty. Sterling weakened more consistently against the yen, which improved the market return for a sterling-based investor to -13.0%

From Japan’s perspective, very little actually changed during the quarter. The Bank of Japan’s regular policy committee meetings resulted in no change to monetary policy, as expected. Economic news was somewhat mixed, but all the data needs to be viewed in the context of a succession of natural disasters in Japan which caused some slowdown in activity followed by a relatively strong rebound in subsequent months.

After a long run of incremental positive data, there are now some signs that the rate of improvement in the labour market may be peaking out. In itself, this was always a statistical certainty as the economy has effectively been operating at full employment for some time, and we continue to see evidence of this flowing though to higher wage growth.

One surprise during the quarter was the earlier than expected confirmation that the next increase in consumption tax will go ahead as planned in October 2019. The final decision on this had not been expected for several months but the early announcement may simply be a reflection of the complexity of the implementation this time, rather than carrying any particular political message. In addition to a range of exemptions from the higher rate, the government is also planning a series of stimulus measures designed to mitigate the type of economic dislocation seen around previous tax increases. At this stage, it remains unclear what the net impact to the economy of all these measures will be.

There was little fresh corporate news for investors after the quarterly results announcements. However, Softbank, the communications conglomerate, did complete a significant initial public offering of its Japanese mobile phone arm, despite the poor market environment. Nissan also grabbed the headlines following the arrest of Carlos Ghosn and his subsequent removal from his position as Chairman of the company. Away from the spotlight, however, Japanese companies have announced record levels of share buybacks in the wake of their interim results, as the trend towards better shareholder returns continues

Otherwise, external factors, rather than domestic events, dominated equity market sentiment.. The potential for further escalation of trade tension remains the most immediate concern for Japan. However, in the short-term, the currency continues to reflect heightened levels of uncertainty over a range of issues from slower Chinese growth to the US budget impasse. The resulting strength of the yen is likely to hamper any immediate return to upward profit revisions for Japanese corporates.

Discrete yearly performance (%)

	Q1/2018 - Q1/2019	Q1/2017 - Q1/2018	Q1/2016 - Q1/2017	Q1/2015 - Q1/2016	Q1/2014 - Q1/2015
Share price	-11.5	6.8	46.1	-10.6	42.2
Net Asset Value	-6.5	8.3	37.8	-6.3	33.0
Tokyo Stock Exchange 1st Section Index (TOPIX) (TR)	-1.8	8.2	33.0	-1.7	26.0

What are the risks?

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.

The Company will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.

The Company holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.

The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.

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Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

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Schroder Japan Growth Fund plc

"We seek to take advantage of local knowledge to provide access to areas of the Japanese market with the greatest potential for added value."

Andrew Rose and Masaki Taketsume

Co-managers of the Schroder Japan Growth Fund