Japan’s stock market hits two-decade high after election - time to buy?

Economy and Policy October 23, 2017 by Tom Bailey

Japan’s stock market has surged to a 20 year high following the successful re-election of Shinzo Abe, the country’s prime minister.

Abe’s decision last month to hold a snap election has paid off, with his Liberal Democratic Party securing two-thirds of seats in Japan’s parliament. 

The news has been greeted enthusiastically by investors who generally see Abe as pursuing much needed economic reforms for the country – dubbed ‘Abenomics’.

On the back of Abe’s victory, Japan’s main stock market index, the Nikkei 225, closed up 1.1 per cent to 21,696, the highest close July 1996. 

As Russ Mould, investment director of AJ Bell noted: ‘Financial markets remain in thrall to the three-point programme laid out when he first took power in December 2012, as the Nikkei 225 index now trades at a two-decade high and it is easy to see why.

‘In the second quarter of 2017, Japan racked up its sixth straight period of growth, its longest run for a decade, and its best sequential rate of improvement for over two years.

‘In addition, the Tankan, the major quarterly corporate sentiment survey, offered a 10-year high reading in early October for both large and smaller manufacturers, while the number of firms citing labour shortages reached levels seen since 1992.’

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However, despite much effort, including at least a dozen rounds of QE and the Bank of Japan plunging lending rates into negative levels, inflation in the Japanese economy has failed to reach its 2 per cent target. 

As central banks around the world also struggle with sluggish inflation, how well Japan’s anti-deflationary monetary policies work out will be closely watched by investors and policymakers alike.

In response to the election, Japan saw the yen weaken against other currencies around the world. The yen fell by 0.3 per cent against the dollar, the weakest it has been against the greenback in three months. 

However, unlike the recent devaluation of sterling, the yen’s fall in value shouldn’t be viewed as a vote of no confidence in the Japanese economy by investors or the market.

Rather, Abe’s much praised economic reforms are geared toward weakening the strength of Japan’s currency. The prime minister’s success signalled to investors that his policies aimed at such devaluation will continue unabated. 

Despite the surge to 1990s-era highs in the Japan stock market, according to Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management, the Japanese market remains a good prospect for international investors.

‘We believe that stock market is cheap and under-owned on a historical basis, and for instance its technology / robotics sector is top notch,’ Heilgenberg said.  ‘The increased attention for corporate governance in Japan could boost return on equity going forward. We now have a positive bias to Japanese equities. The Japanese government bond market remains dominated by the BoJ. 

‘There are some tactical opportunities, for instance to go short when interest rates drift to the low end of the current BoJ-managed range of 0 basis points on the 10-year bonds, but it seems uninteresting as a longer-term investment.’

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