Japan has had a cracking year – buy in if you haven’t already

published 17 March 2015

150317-japan-stocks — Japan's Nikkei 225 stock index topped 19,000 for the first time in 15 years on Friday

What's been the best-performing major stockmarket this year?

The eurozone maybe? Stocks in the region have soared now that the European Central Bank has finally launched quantitative easing (QE).

Or maybe the US? I mean, it's been a fantastic performer for ages now, why stop this year?

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Or even the UK? After all, our economy is rallying strongly.

Nope.

In US dollar terms (the strongest currency of the lot right now), the best performing market has been MoneyWeek's perennial favourite, Japan

Japan's genuine comeback rally

Back in 2012, when prime minister Shinzo Abe launched his Abenomics' plan based largely on twisting the Japanese central bank's arm to print more money than anyone thought possible (relative to GDP) Japan's stock market soared. It gained something in the region of 80% in a year.

That's the magic of quantitative and qualitative easing' (QQE) for you.

However, the Japanese yen collapsed at the same time. So as it pans out, if you didn't hedge the currency, you'd have done fine, but no better than if you'd stuck your money in US shares. (We're using US dollar terms here but it's not dissimilar for sterling).

The weak yen wasn't a bad thing as Peter Tasker notes, also in the FT, one of the first signs that QQE was working was "a massive increase in foreign visitors attracted by its bargain basement currency". But from a foreign investor point of view, it's one extra factor to keep an eye on.

There was then a bit of a slump as the euphoria passed and everyone panicked about a rise in the sales tax hurting economic growth.

But from last July as the oil price plunged (good for Japan) and the US dollar surged the market has picked right back up. And this time, it's a much healthier rally, says Mackintosh. Because it's based on a lot more than just a weak yen.

Company earnings are expected to grow by 15% over the next year, at a time when profits in several other major markets are looking ropy. As Mackintosh puts it, "combine rising profits with a cheaper valuation, and the rally looks a lot more sustainable this time around".

As Tasker adds, Japan's exporters normally use currency weakness "to cut prices and grab overseas market share". This time round, they've kept the benefits for themselves boosting profits. Meanwhile, with the jobs market extremely tight (tighter than at any point since the late 1990s), wages are likely to rise good news for Japanese consumers.

Japan could print yet more money

And even although the tight labour market means that "ongoing spring wage negotiations will likely end with a sizeable increase in base pay inflation has continued to moderate". In fact, they reckon that "inflation will turn negative in the second quarter".

That leaves the BoJ with a tricky balancing act. Falling oil prices are a benefit for Japan as it's a net energy importer. So really, you can argue that falling energy prices are inflationary for Japan it puts money in people's pockets and increases demand, all else being equal.

However, BoJ governor Haruhiko Kuroda doesn't see it quite like that. For him, Japan has been mired in deflation for so long that people's expectations of inflation are a key factor in all this. And to keep expectations up, you need to see that headline number rising. So "a clear commitment to reaching the 2% inflation target as early as possible is essential", as Capital Economics puts it.

So it's quite possible that even although the economy is clearly recovering, profits are picking up, and things are looking good we might see even more money-printing in Japan before too long. And whatever you think of it, chances are it's going to do exactly what every other dose of money printing has done before it boost asset prices.

In short, stick with Japan. If you're not already a subscriber to MoneyWeek magazine, you can sign up now, and read up on some of the best ways to invest in Japan, as well as other markets that we like, with this free catch-up report. You'll also get your first four issues of the magazine free.

(And if you're already a subscriber, you can access the report by logging in and going to our special reports' section).

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.