Japanese stocks are a two-way bet

Japan has dodged the worst of the pandemic, but its economy has not been so lucky. Despite its relatively elderly population, death rates from Covid-19 have been among the lowest in major countries. Yet the world’s third-largest economy still entered a recession in the first quarter.

More bad data is on the way; economists predict a 20% annualised slump in GDP for the second quarter, which coincided with a national state of emergency.

The economy has been gradually reopening since the end of May, with finance minister Taro Aso declaring that activity “seems to have hit bottom”. The benchmark Topix stock index is down 6% so far this year, but has rallied 28% since a mid-March low.

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Lavish stimulus

Japanese policymakers have responded to the downturn with aggressive stimulus measures. The central bank, long a monetary innovator, has pledged to buy a maximum of ¥12trn (£88bn) in stock exchange traded funds (ETFs) this year. Previous purchases mean that the Bank of Japan already owns roughly 8% of the country’s entire equity market, says Scott Longley for etfstream.com. The bank has also pledged to take its stock of corporate debt up to ¥20trn (£150bn). Politicians are also testing “the limits” of fiscal stimulus, says The Economist. Tokyo has pledged $2.2trn in support, including loan guarantees – equivalent to 40% of the country’s entire GDP.

Japan’s government debt is already the world’s highest at 240% of GDP and is heading higher still. The wall of budgetary “red ink this year tests the limits of comprehension”. Yet with the central bank backstopping government bond prices, markets have simply “yawned in response”.

Overshadowed by the surge on Wall Street, Japanese shares have been quietly outperforming European and emerging markets this year, says Mike Bird in The Wall Street Journal.

On a forward price/earnings ratio of 15.7, stock valuations remain reasonable. Japanese companies look like a two-way bet. If a global recovery takes hold then Japan’s export-orientated electronics and communications businesses will enjoy a surge. But if growth stays weak then the mammoth ¥280trn (£2trn) corporate cash mountain is a mighty bulwark.

Those cash reserves underpin the country’s attractions as a dividend destination, says Moxy Ying on Bloomberg. Japanese stocks currently yield an average 2.5%, similar to major continental bourses and much better than the S&P 500. Robust balance sheets, dividends and “political stability” are the key attractions, says Societe Generale. The bank thinks that the Land of the Rising Sun looks like the “perfect place to be”.