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Vera Yuan
Vera Yuan
Articles (1063) 

T. Rowe Price Japan Fund Second Quarter 2014 Manager Commentary

July 21, 2014

Japanese stocks posted strong returns in the second quarter, outperforming broader developed markets and reversing the declines of the previous three months in U.S. dollar terms. Economic data showed that the Japanese economy expanded at a faster rate than expected in the first quarter of 2014, which was the best quarterly growth rate seen in almost three years. Consumer confidence improved for the first time in six months in May while producer prices rose at the fastest annual rate since October 2008. Investor sentiment was further boosted by encouraging economic data from China, a key export market for Japan's manufacturers, and the Federal Reserve's commitment to maintaining an accommodative policy stance.

The Japan Fund returned 6.40% in the quarter compared with 6.89% for the TOPIX Index and 7.29% for the Lipper Japanese Funds Average. For the 12 months ended June 30, 2014, the fund returned 10.85% versus 11.36% for the TOPIX Index and 12.99% for the Lipper Japanese Funds Average. The fund's average annual total returns were 10.85%, 10.29%, and 2.75% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 1.06% as of its fiscal year ended October 31, 2013.

We have maintained a balance in the portfolio between companies that are more dependent on overseas demand (and therefore a weaker yen) and the more domestically oriented sectors, which will benefit from the Bank of Japan's efforts to end deflation. Stock selection weighed on performance during the period, especially in pharmaceuticals. Conversely, our holdings within electrical appliances and precision instruments and transportation and logistics made positive contributions to relative performance

While sentiment could easily waver as Prime Minister Abe's reform efforts are called into question, investors with a longer-term view are likely to reap the benefits of any pullback. We believe policy efforts should provide further traction in the next 12 to 24 months, and we will look for further signs beyond this period that Japan is turning into a durable improvement and self-help story. In addition, we see scope for surprise versus consensus estimates given that corporate earnings forecasts have not fully accounted for yen weakness, and we see ample room for expansion in margins and returns.

For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.

The Japan Fund charges a 2% redemption fee on shares held 90 days or less. The performance information shown does not reflect the deduction of the redemption fee; if it did, the performance would be lower.

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