Yen may turn on unit trust investors

SELL YOUR Japanese unit trusts now, before the shadows lengthen further in the Land of the Rising Yen. That's the advice from stockbroker Barclays de Zoete Wedd's equity strategist in Tokyo, David Pike - and it contains a few paradoxes.

Hijackers, poison gas and earthquakes are not Japan's only problems. Remember when they used to say that the all-conquering Japanese market could only go upwards? The Nikkei share index continued to come under pressure last week after the three-year lows of the previous week. At Friday's close of 15,265, its 1989 peak of 38,915 was just a memory.

With prices falling and an economy whose post-war achievements are turning sour, further deflation threatens as the 18-month-old mini-recovery seems to be petering out.

Property prices have already halved since the asset price bubble burst in 1991, the banks are overwhelmed with bad debts, unemployment is at its highest level ever, the trade war with America is jeopardising an already shrinking trade surplus and there is no sign of a government bail-out for the stock market.

Normally, however, unit trust investors, as long-term savers, would be best advised to sit things out rather than sell into a falling market. However, the rising yen may not rise forever, and that is why it looks wise to sell now. "British private investors in Japan have had some insulation from the real pain of the market's fall, thanks to the yen's strength," says Mr Pike.

While a yen that is now worth more than an American cent has at last dented Japan's ability to sell overseas, it has helped stock market returns to look good in foreign currency terms.

Securities houses such as Kleinwort Benson have long been forecasting a fall in the yen in 1996, as the trade surplus shrinks. Rather than mount a bail-out, the government may see devaluation as its escape route. At the same time, a good performance by John Major in the Tory leadership election could put a floor under the pound. That would put the British investor in Japan at the mercy both of currency and stock market movements.

Mark Wood, manager of Foreign & Colonial's Japanese Growth fund, agreed with Pike's analysis. "There is logic in selling if you are in a fund which, unlike ours, is not hedged against a falling yen."

But he is bullish on market prospects.

Stewart Paterson, whose Hill Samuel Japan Technology Fund is 25 per cent hedged, agrees that the yen will fall. Andrew Fleming, head of Asia Pacific at Gartmore, says the several Japan funds in his stable are about 15 per cent hedged. "We want to protect the sterling value of the fund," Fleming says. But investors may not want to wait.