Well things have certainly been changing in the world’s second largest national economy, as last week’s Japanese 4th Quarter GDP figures underlined. They certainly surprised the markets, as they indicated that Japan has had some significant growth in the economy and showed that it had in fact been running at 4.8% on an annualised basis – certainly a better figure than the US.

This growing recovery may be further affirmed later this week when the Bank of Japan meets to decide whether interest rates should rise again. If rates were to rise it would hardly be meteoric but nonetheless significant, jacking up rates from 0.25% to 0.5%. This would come with much relief to certain moaning ministers who recently attended the G7 meeting and urged action by the Japanese authorities to address the continuing weakness of the Yen.

What I find far more interesting is the expected impact of what such a small rise might have domestically in Japan. In the UK if rates rise we quite rightly fret about the impact on peoples’ borrowing and the increase in mortgage payments, as well as the effect on the vital level of consumer spending.

Not so in Japan. It has been estimated that a 0.25% rate hike could increase household income by 1.1 Trillion Yen (around £233 billion!) which is an approximate increase of 0.4% in household income. This in turn could further support consumer expenditure and consequently provide a timely fillip for the vital but struggling retail side of the economy. How quirky does this seem when compared to our heavily indebted consumer society? In Japan the growing army of actual and would-be pensioners have been saving their hard earned cash and, since the start of the depression in the early nineties, have veered away from the financial maelstroms of the Japanese property and stock markets. So an extra “bip” on the deposit rate can have a marked impact.

Maybe it might also provide some more logical valuation of Sterling, which will be good news for UK investors in Japan who have often seen good investment decisions devalued by the currency. It seems that this has already started to have an impact. With Japanese property having shown quite a dynamic gain after a decade of depression, investors may now be seeing a double benefit.

However, I should also mention that this silver cloud may have a somewhat darker lining. The “carry trade” (borrowing low cost currency and lending it out in another) has grown hugely on the back of the low Yen rate and any increase could create a nervous ripple, not unlike the one we saw this time last year in Iceland. This would be another worrying issue for certain emerging markets.

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There seems to be no stopping their growth – or is there? The number of investment mortgages (usually buy to let) has boomed over the past decade. In 1998 there were a mere 28,700 - but compare that with the current figure 849,000. Last year alone apparently 330,000 buy to let loans were taken out, with an astonishing value of £38.4bn, which accounted for 11% of all lending.

So is this just a good rising trend or are we seeing a bubble about to burst? Certainly some of the evidence is concerning. Although the banks and other mortgage lenders seem confident enough (well they would be, as they are the main product purveyors), empirical evidence indicates that there is a growing level of repossession in this sectors as well as flats being left void and without tenants - not a healthy situation for amateur landlords who may well be financing mortgages out of rental income. This in turn has led to examples of some local price falls which I am sure must be causing some significant pain.

Currently the gross yield on standard residential property is about 5% according to the Association of Residential Letting Agents, a figure which is significantly below the usual cost of borrowing. Now this does not matter if you are happy that the capital price of the property is still rising but if not, then – oops! Though total returns from property investment are still positive due to rising rents pushing up values, worryingly the IPD Index shows UK property values to have risen more slowly than rents in almost six years.

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And finally……have I got ewes for you - after our recent breath of Winter it is encouraging to hear that even in the world of gritting there are continuous advances at the cutting edge of gritting technology. I understand that some councils have recently been introducing a new concoction of surface grit to fight the worst effect of our inclement weather. This has included a new mixture being added, consisting of rock salt mixed with molasses - apparently to ensure it’s more effective adhesion to the surface. However, despite this technological innovation, sadly it has also had some unexpected consequences – seemingly some wily Welsh sheep, an already much put upon community, have noted this change and have sampled the new recipe and unfortunately absolutely love it.  Now as the gritters go about their business, the adventurous sheep flock down to the highways to lick it off.  Can we call this a new type of ram raid?

Oh yes and Xin Nan Yu Kuai for a prosperous Year of the Ding Hai (Boar).

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management