For many investors, investing in Japan over the last three decades has been an unpredictable and difficult one. Progress is rarely straightforward as companies, as well as most of the population, struggle with any kind of change. But yet again, change appears to be on the horizon. The third quarter of 2021 was a particularly busy one for the Japanese government as it sought to limit the spread of Covid-19 and prepare for an Olympic games that most of the country did not want.
However, over the last month, the Japanese equity market has rallied strongly following the announcement at the start of September by Prime Minister Suga of his intention to step down as party leader. This news reignited foreign interest in Japan and the TOPIX reached a 30 year high. Mr Suga had been appointed to the role just a year ago following the resignation of Shinzo Abe, but after much criticism of his handling of the Covid-19 crisis and other issues his approval ratings dropped to an all-time low. He had been seen as a weak and unpopular leader and was damaging the electoral chances of the ruling LDP in a general election due in November.
On Wednesday last week, former foreign minister Fumio Kishida was appointed as the new party leader and is expected to become prime minister within days because of the LDP’s majority in the lower house. Kishida’s win is seen as one of stability and for not rocking the boat, so no drastic change is expected here. He has proposed a spending package of more than 30 trillion yen in order to achieve economic growth and distribution of wealth, promising housing and education aid. And while Suga was no disaster for the stockmarket, Kishida would be seen as a pro-market prime minister.
So what are the prospects for Japanese equities? Japan has certainly lagged behind other developed market regions over the last year over concerns that Suga’s leadership was holding back the economic recovery, so the recent rally could just be seen as a catch up with these other markets. However, there is data indicating that there is a strong strategic case for Japanese equities on a valuation basis, showing that it is now the cheapest it has been since 2013 following the 2011 earthquake tsunami. Japan has underperformed other global equity markets over the last three years so this recent rally could be seen as a turning point for the stockmarket.
Japan is often seen as being linked to the health of the global economy, and as such should fare better going forwards as the global economic recovery and the prospects for exporters improve, as well as being a beneficiary from the economic changes caused by the pandemic. In their 2021 midyear global outlook, fund managers Blackrock say on Japanese equities that they see a global cyclical rebound helping boost earnings growth in the second half of the year. They also see an improvement in the country’s virus dynamics, and so may be something to consider.