Advertisement

Japan’s rally has room to run

Japanese stocks may be 10% off their spring highs, but the rally's not over yet.

Between November 2012 and May 2013, Japanese stocks jumped by 75%. They are now 10% below their spring highs. But "Japan remains attractive as both a recovery story and a growth story", says Ed Rogers of Rogers Investment Advisors. The rally isn't over yet.

The main impetus behind the surge has been Abenomics, the government's concerted effort to end two decades of deflation and stagnation.

Advertisement - Article continues below

Part one of the plan is to print money in gargantuan quantities. The Bank of Japan's balance sheet is set to expand by 20% of GDP over the next two years as it injects money into the economy by hoovering up bonds with newly minted cash.

The US Federal Reserve's balance sheet has only grown by 12% of GDP since it first began quantitative easing in 2008, notes Morgan Stanley. Abenomics also involves a fiscal boost and structural reforms to bolster the economy's long-term growth potential.

The slide in the yen resulting from all this money printing has raised corporate profits many major Japanese firms are exporters and lit a rocket under stock prices.

Higher asset prices, along with optimism fuelled by Abenomics and a cyclical recovery post-tsunami, has cheered up households and businesses.Employment growth is at its highest since 2007; retail sales and small business confidence are also at multi-year highs. GDP growth stands at 4% on an annualised basis. So why has the rally paused in recent weeks?

A key problem has been global jitters caused by the US fiscal stand-off. Declines in risk appetite buoy the yen, which is seen as a safe haven. So the end of the stand-off is good news.

And while risk aversion could flare up again, the big picture is that the US Fed is set to temper its money-printing programme next year, while its Japanese counterpart won't, says Capital Economics. This implies further yen weakness, as does Japan's vanishing current account surplus.

So profit growth should continue, especially since Japan Inc's operational leverage is so high, says Morgan Stanley. For every 1% in revenue growth, profits rise by 3%, compared to 1% in Europe and the US.

More detail on structural reforms, due in December, and reductions in corporation tax should also help. Stocks are also still cheap. The upshot? The Topix "could double" from here.

Advertisement
Advertisement

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
There are lots of reasons to be bearish – but you should stick with the bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Good news on jobs scares US stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
How Covid-19 sparked the return of the day trader
Investment strategy

How Covid-19 sparked the return of the day trader

Lockdown boredom has unleashed a horde of speculators on US stocks, with predictable consequences.
7 Jul 2020

Most Popular

How “support” and “resistance” can help you spot trading opportunities
Sponsored

How “support” and “resistance” can help you spot trading opportunities

Technical analysis can help traders manage risk and decide where to enter and exit a trade. One simple form of technical analysis is the concept of “s…
6 Jul 2020
House price crash: UK property prices are falling – so where next?
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
A first-half home run for investment trusts
Sponsored

A first-half home run for investment trusts

The investment trust sector has seen some extraordinary performance in the first half of this year. Max King looks at what's behind it, and asks: is i…
7 Jul 2020