Our current view on Japan comprises three main bearish elements, and three bullish ones. We will turn first to the bearish considerations.
The Bank of Japan's (BoJ) monetary policy is relatively tight; it has been on the sidelines to a greater extent than other central banks during the pandemic.
The BoJ feels that significant easing would be counterproductive, in part because its purchases of Japanese government bonds a few years ago impaired the market.
Second, some of the country's dominant sectors are out of favour, such as autos and finance. Toyota is the biggest stock in the market and much of Japanese industry is geared to supplying that company.
Toyota could especially be at a disadvantage if the industry moves in the direction of Tesla, as it has not kept pace with the advanced technology. Margins in the financial sector are also under pressure with rates at historic lows.
Third, Japanese leadership will be a question mark with the likely departure next year of Prime Minister Shinzo Abe as there is no obvious successor. Despite his current unpopularity, Abe has been good on foreign policy, and promoted corporate governance reform.
On the bullish side, the reform I just mentioned has been reasonably successful in opening up its market to foreign investment and encouraging dividend payouts.
Second, equity and currency valuations look reasonably inexpensive, by historical standards. Even JGBs, given how far other rates have fallen, and the assumption that Japanese inflation will likely stay lower, longer.
Finally, Japan has done a good job in containing Covid-19. With the density of population centres such as Tokyo, the country appears vulnerable to serious virus spread, but overall containment has been very effective.
On balance, our view tilts strongly towards bullish. Abe's legacy is a strong one, in terms of opening up the country, corporate reform, and balancing its interests with those of the US and China.
The yen has depreciated for a long time, even as the terms of trade (such as the lower price of oil) have greatly improved.
Lastly, investor sentiment has been so bearish for so long, even a modest turn in views can have a significant impact on Japanese assets.
Eric Stein is a vice president of Eaton Vance Management, co-director of global income and portfolio manager in Eaton Vance's global income group
• Equity and currency valuations look reasonably inexpensive, by historical standards
• Japan has done a good job in containing Covid-19. With the density of population centers like Tokyo, the country appears vulnerable to serious virus spread, but overall containment has been very effective
• Japanese leadership will be a question mark with the likely departure next year of Prime Minster Shinzo Abe - there is no obvious successor.
• The Bank of Japan's monetary policy is relatively tight - it has been on the sidelines to a greater extent than other central banks during the pandemic