LEADING: Japan is the best performing major stock market this year, up 23% in US dollar terms, doubling from its pandemic low, and closing in on the all-time-high from 1989 when its epic property bubble burst. Whilst often overlooked it remains a top 3 global economy, stock market, and currency, and home to many world-beating companies from Sony (SONY) to Toyota (TM). The benchmark Nikkei 225 has been boosted by low interest rates and the weak Yen (see chart), an improving economy, corporate governance reforms, and returning foreign interest led by Warren Buffett. This is more than enough for now, but it faces risks of a global slowdown and formidable longer-term challenges of tighter policy and structural headwinds. @AsianDragons.
PROS: The combination of a strengthening local economy, exposure to a reopening China, and the competitiveness boost from the weaker Yen, have all helped drive forecast earnings growth towards double-digit levels. The cyclicals-sector-heavy market (EWJ) remains reasonable value, with a prospective price/earnings ratio of 14x, and with many companies trading below their book value and with net cash positions. Strong foreign investor inflows may have more to go, after years in the investment wilderness, and those from typically cautious local investors have barely started. A possible snap election could solidify prime minister Kishida’ position into 2025.
CONS: Japan’s economy and stock market have seen plenty of false dawns before. Corporate governance changes are a work-in-progress and corporate profitability is still the lowest of major markets. Japan faces formidable structural headwinds with a shrinking working age population and rising dependency ratio, alongside the world’s highest 260% government debt/GDP levels. It’s a global interest rate outlier. The inevitable tightening will strengthen the dramatically cheap Yen and may undermine markets, with the central bank dominating stocks and bond markets.
All data, figures & charts are valid as of 16/06/2023