Japan: land of the rising stocks

published 6 January 2017

Talk about a "Trump bump". Japanese stocks are among the assets "most geared" to rising US rates, a strong dollar and weak yen, and an increase in global growth, says Jesper Koll of Wisdom Tree Investments. The broad Topix market index gained almost a fifth once Trump's reflation of the US economy began to be priced in. The more widely quoted Nikkei 225 index posted a similar performance and has now managed a fifth consecutive rising year a feat last achieved during the 1980s bubble years.

The good cheer looks set to last. Now that the yen is falling again, the earnings of the stockmarket's heavyweight exporters should head higheronce more. The yen-dollar rate has bounced from around 102 to 117 since November. The Japanese economy looks on track for 1% growth this year, with pricing pressure slowly gathering momentum, reckons Capital Economics. That is just about good enough to suggest that the Bank of Japan won't provide added monetary stimulus for now. But it is determined to anchor ten-year bond yields at zero, which should be enough to put further downward pressure on the yen, especially since likely US interest-rate rises mean the yield on US assets will head higher.

What's more, predicts Deutsche Bank, the difference in yields may be big enough for the yen carry trade to make a comeback. The trade entails borrowing yen assets, selling them, and investing the proceeds in higher-yielding securities elsewhere thus keeping the yen weak. There is scope for the yen-dollar rate to reach 130, according to Capital Economics. Earnings estimates should therefore head higher: Wisdom Tree calculates that "every five yen of depreciation [against the dollar] adds back four percentage points to earnings". Exporters, moreover, are still budgeting for a yen-dollar rate of 103.

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Still, Japanese stocks are not merely a Trump-dollar-yen story. In 2014, "Japan started getting serious about corporate governance and investor stewardship", says the FT's Leo Lewis. That means keeping investors happy by returning more money to them in dividends and share buybacks. Typical dividend payout ratios are still well below levels in other regions, so there is plenty of room for improvement. On the buyback front, Goldman Sachs thinks that Japan Inc, which is flush with cash, could hit 6.5ttrn yen in the year to April 2017.

The Bank of Japan has doubled its annual ETF-buying target to 6trn. The government pension fund has upped its equity allocation too. Foreign investors have drifted away from Japan recently, so there is ample scope for them to return to the party. In short, there is considerable potential buying power waiting in the wings. What's more, 40% of the market is on a price-to-book-value ratio of below one. Capital Economics thinks the Nikkei could gain 14% this year.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.