Japanese equities remain compelling for investors

This year has not been kind to Japanese equities. But this looks wrong-headed given the encouraging backdrop.


This year has not been kind to Japanese equities. The Topix index fell by 9% from its January peak, reflecting "an unhelpful shift in investor mood", says Fidelity's Tom Stevenson in The Daily Telegraph. Investors have been worried about Japan because it has a trade surplus with the US and is therefore highly exposed to Donald Trump's protectionism. What's more, the yen is widely deemed a safe-haven currency, so global market upheavals tend to strengthen it, making Japanese exporters less competitive. These factors have hit sentiment hard this year and foreign investors have headed for the exit.

But this looks wrong-headed given the encouraging backdrop. Japan has returned to solid growth after shrinking in the first quarter. The world's third-largest economy expanded at an annualised pace of 1.9% between April and June.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Japanese equities are heading in the right direction

Other indicators appear promising, too. Japanese companies are spending more on technology as they cope with the tightest job market in decades. Unemployment has halved since 2010 and stands at 2.3%, and there are more than 1.5 job vacancies for every applicant. This has led to the strongest wage growth for more than 20 years. In addition, recent reforms have brought more women into the labour force and the government has relaxed its attitude to foreign workers by granting short-term visas for the tightest sectors such as healthcare and tourism. The upshot is that higher wages should fuel consumption which accounts for around 60% of GDP and growth unless trade conflicts with the US worsen, according to Megumi Fujikawa on MarketWatch.

The hope is that higher wages will put upward pressure on prices, leading in turn to higher wages. The data show that so far increasing labour costs haven't created this virtuous circle, which would definitively put an end to two decades of deflation. The nationwide core consumer price index (CPI), which includes oil prices but excludes volatile fresh food prices, rose 0.8% year on year in July. The Bank of Japan remains far from its 2% inflation target.

Advertisement - Article continues below

But that also means the equity market will continue to benefit from the Bank of Japan's money-printing programme. And while market liquidity remains ample, the number of companies with foreign sales at more than 30% of their total has doubled in the past 15 years, according to Stevenson.

This reflects growing confidence and activity overseas. Throw in a forward price-earnings ratio for the average Japanese share of just 12 times expected earnings, compared with 17 in the US and Europe, and the market looks "compelling".



Stock markets

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
Stock markets

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

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020

Money Minute Wednesday 12 February: grim times for European industry

Today's Money Minute previews industrial production in the eurozone, plus the latest from America's central bank.
12 Feb 2020
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019