Japan has tried for years to boost its economy by keeping interest rates at record lows and buying assets in the marketplace at unprecedented rates. Some may say the stimulus has been extreme, with little economic growth to show for it as a result.
But that has not stopped investors and fund managers from squeezing robust returns out of the country’s equity market. And perhaps now, more than ever, the tide may finally be turning. Japan’s macro data is starting to show the green shoots of economic growth that could help to bolster the investment case for the region even further.
Unemployment continues to fall, and currently stands at 2.8 per cent. This figure blows developed market unemployment out of the water, where jobless rates in the UK and the US are closer to 4.5 per cent than 3 per cent.
Of course, the historical structure of the Japanese economy is quite different to its developed market peers, making it impossible to draw a direct comparison on the basis of unemployment rates. But other measures are supporting the uptick in the Japanese macro environment. The jobs-to-applicants ratio hit 1.48 – its highest level since 1974 – and industrial production rose to its highest point since 2008 at 4 per cent month-on-month.
Inflation, one of the key goals for the Bank of Japan, is now starting to come through. While still some way off the central bank’s 2 per cent target, headline inflation has been rising. Core inflation has been a bit more challenged, so we will be keeping a close eye on developments in non-energy, non-food prices.
Corporate governance has been an enduring theme of the Japanese market for the past few years, highlighted by the creation of the new JPX-Nikkei 400. The index will be composed of companies with high appeal for investors, and which meet requirements of global investment standards, such as efficient use of capital and investor-focused management perspectives. It will promote Japanese corporations both domestically and abroad, while encouraging continued improvement of corporate value, thereby aiming to revitalise the Japanese stock market.
The long-standing relationship between a weak yen and TOPIX gains is shown in this week’s chart. This yen weakness could continue if the US Federal Reserve raises rates faster than the market currently expects, which would be supportive for Japanese equities. And there are also more fundamental factors supporting Japan, notably a strengthening global economy, which has helped the country's global exports to grow by a whopping 12 per cent year-on-year. Meanwhile, exports to the US have risen by 3.5 per cent year-on-year and could be buoyed by further yen weakness.
Japan remains an inefficient market, and we continue to find many attractive investment opportunities in the country, especially in its under-researched mid-to-small-cap space. Analyst coverage in Japan is patchy compared to that of the US and Europe: in fact, a staggering 58 per cent of Japanese companies are covered by only one sell-side analyst, compared to 9 per cent in the US equity space and 7 per cent in Europe.
This lower level of coverage of Japanese companies creates a clear opportunity for active managers to generate greater alpha by finding stocks that are less well researched. From a portfolio management perspective, it is also important to avoid companies and sectors that face structural issues, even if they are large constituents of the benchmark.
Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management
