Friday Highlight  

Why recent losses by Japanese equities have been relatively limited

Why recent losses by Japanese equities have been relatively limited
Shibuya Crossing, Tokyo, Japan. (Ling Tang/Unsplash)

Global equities have been on the back foot so far in 2022, weighed down by factors including inflation concerns, the threat of higher interest rates and geopolitical risks.

Japanese equities have also suffered in 2022, although their decline has been limited compared to global peers.

One reason losses by Japanese equities have been limited is because Japan has been less affected so far from the negative effects of global inflation and the geopolitical risks emanating from the Russia-Ukraine conflict. 

We believe that another reason behind the relatively good performance by Japanese equities is due to how industries are set up in Japan compared to other developed market economies.

With coronavirus restrictions being lifted across the developed world, consumption patterns – particularly in the US – have clearly shifted from those centred on stay-at-home demand to out-of-home activity, such as shopping, dining and traveling.

This shift has resulted in lower growth expectations for stay-at-home stocks, in turn denting growth prospects for giant tech companies.

All in all, this development has negatively affected stock market valuations.


Japan, in contrast, does not have any notable stay-at-home stocks nor big tech names to speak of.

Export growth supported the country during the pandemic; Japan’s industrial structure is centred on export goods, while entertainment services (such as subscription streaming providers) play a limited role.

As such, any decreases in stay-at-home demand does not have much of an impact on Japanese stock indices.

Furthermore, Japanese exporters have been boosted by the steadily declining yen. 

This industrial structure, which has helped limit losses in Japanese equities due to a shift in consumer demand patterns, may suit foreign investors seeking to make defensive asset allocations.

Japanese equities may therefore provide a sound choice for those looking to allocate their assets at the country level. 

Tourism and impact on the Japanese economy and markets 

After closing its doors to foreign tourists following the Covid-19 outbreak two years ago, Japan is poised to relax its entry restrictions in a bid to lure back travellers from abroad.

This month, tourists from 98 countries and territories have been allowed into Japan, although visitors will initially be limited to those taking part in guided package tours.

The government, which plans to eventually allow the number of tourists to recover to pre-pandemic levels, appears to have been nudged into action after being criticised as the only G7 nation maintaining stringent border controls.

However, the government may not want to take too much risk before the upper house elections in July.

Once the elections are safely out of the way with the outcome in its favour, the government may be emboldened to further relax its stance on inbound tourism, and a variety of domestic sectors geared towards foreign visitors could benefit as early as the summer. 

As the number of foreign tourists to Japan had practically dropped to zero during the pandemic, even a modest recovery will look impressive.