As discussed, any assessment of Japanese equity markets must also taken into account the yen. After such a strong rise against sterling, some investors may be expecting a reversal, and many funds still offer hedged share classes that will protect a fund from a fall in the yen.
Forecasters at Trade Economics predict that the yen is unlikely to strengthen further for the next five years, but if the currency does continue to rise, these hedged share classes will do much worse than an ordinary Japan fund.
Exercising caution
It is abundantly clear that the Japanese market presents an opportunity and a risk to investors. The immediate risks may come from further afield. The general consensus seems to be that if Hillary Clinton wins the US presidential election, global markets may be able to benefit from a newfound sense of confidence.
However, the Brexit result provides a stark reminder that political outcomes do not always follow expectations, and a surprise win for Donald Trump would cause certainly cause a reaction in all global equity markets.
From a Japanese point of view, it is clear that the government understands the issues the country is facing and is attempting the take the necessary steps to provide the remedy. The potential is there, but it could take time for political actions to take effect.
This has been evident in the past few years, given that the Abenomics programme was initially met with a wave of approval from equity market investors, only for their confidence to dwindle as inflation and economic growth once again proved hard to come by.
Recent returns have also been given an artificial boost by the strength of the country’s currency. This strength will not last forever though, and while it is certainly too early to write off Japan for the next few years, a degree of caution should probably still be exercised.
