The Japanese equity markets have been pretty volatile over the recent years, reflecting some significant challenges embedded in the macroeconomic context and some high risks associated to the stockmarket. In the meantime, Prime Minister Abe's government has been committed to supporting both the economy and financial assets.
As promoted by the Abe cabinet for a number of years, the domestic economy in Japan has been recovering. Indeed, in Abe's agenda, the first arrow (monetary stimulus, mostly benefitting exporters through yen depreciation) is now in the past, while the second and third arrows, based on fiscal stimulus and structural reforms respectively, should benefit the domestic economy.
Domestically-focused sectors are likely to be the primary beneficiaries of government support now on.
Over the next couple of years, the overall Japanese market should benefit from a number of positive drivers. If approved by the US Congress, the TPP (Trans-Pacific Partnership) will open most sectors to foreign competition which could lead to significant opportunities for Japanese investors.
TPP is a free-trade agreement which has been negotiated by 12 countries including Japan, US, Canada, Mexico, Australia, New Zealand, Singapore, Brunei, Malaysia, Vietnam, Chile and Peru.
Despite the rebound in Q1 2016, the yen is still close to its cheapest level in 20 years. A cheap currency continues to provide support to Japanese equities as it helps make companies more globally competitive.
However, some important issues will be challenging for the Japanese equity markets.
There are structural workforce-related demographic concerns with a problematic ageing population. A public debate about immigration must start (by 2030, population will decline by one million each year).
Alongside these demographic concerns, major reforms are needed and will not be easy to implement, such as the reform of the social security system which is too costly. Besides, at -6%, the fiscal deficit is still too large and will need to be reduced.
Bruno Taillardat is executive director & head of investment management, equities, and Gaël Combes is fundamental risk analyst, equities at Unigestion
Bull Points
• Improved governance practices in Japanese corporates
• The equity market valuation is attractive in Japan
Bear Points
• Contagion risk from Asian partners: some companies are highly sensitive to the Chinese economic slowdown
• Japan still has the highest public debt level in the world at almost 250% of GDP
