Japan’s bear market: a buying opportunity

Despite the drop in the value of Japanese shares, the fundamentals look auspicious.

Japan has fallen into another bear market, with the Nikkei 225 index now 20% below its early December level. It seems to have fallen victim to "a new form of contagion, from the oil price", says John Authers in the Financial Times.

As we've noted in MoneyWeek on several occasions, sovereign wealth funds (SWFs) from oil-rich nations, which have around $3.44trn of assets under management, have been selling some of their holdings to provide a buffer against plunging oil prices. And Japan is the SWFs' "favourite place to go" when they need to liquidate in a hurry, says Leo Lewis, also in the FT. It is Asia's biggest market and its most liquid, so positions can easily be rebuilt. It was also the developed world's top-performing market last year, so there are profits to take.

However, despite the drop, the fundamentals look auspicious. Plunging oil is good news for Japan, which imports almost all of its commodities. While the yen has strengthened recently, the big boost from the currency's fall over the past few years has underpinned earnings growth at Japan's heavyweight exporters.

"Abenomics" seems to be helping: "Japan is no longer a deflationary outlier and has seen inflation rise at a time when it has been moving in the opposite direction virtually everywhere else", says Jonathan Allum of SMBC Nikko Capital Markets. The Bank of Japan may even increase the pace of is quantitative-easing programme. All this suggests that the latest market falls are a chance for long-term investors to top up their holdings.

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