Japanese stocks have more than doubled their returns since December 2012, on the back of Abenomics, but many investors are still not convinced of the sustainability of the rally.
This is apparent as Japan is the cheapest developed equity market at 12x forward P/E, compared to the US (15.5x) and Europe (13.2x). This discount is probably because Japanese corporate earnings growth is the lowest among the developed markets.
Externally, uncertainties surrounding global trade is a big factor that is negatively affecting corporate capital expenditure. China is Japan's biggest trading partner, and escalating trade tensions between China and the US would have repercussions on Japan.
Also, the US and Japan are currently engaged in trade talks, with the US looking to reduce Japan's auto exports, which is the largest source of the bilateral trade deficit.
Internally, the impending sales tax hike from 8% to 10% in October is expected to be a drag on domestic growth. Indeed, the consumer confidence index has already been declining in anticipation of the hike.
These concerns could be warranted, as the last time the sales tax was raised in April 2014, it tipped the country into a recession.
The government, however, appears better prepared this time, and has earmarked ¥2trn in various spending measures to offset the impact on the economy.
These include providing consumers with credits from their spending via credit card or other electronic means, as well as pushing companies to cut prices.
Telecoms giants KDDI and NTT Docomo's have recently announced new mobile phone plans that are up to 40% lower than previous plans. This will help consumers but at a cost to the companies.
Structural issues remain in Japan, but Prime Minister Shinzo Abe has made progress in several areas. Corporate ROEs have been on the rise, with corporates more focused on returning value to shareholders. Japan's female labour participation rate has also risen to 71%, higher than the US and Europe.
This has contributed to the labour force participation rate hitting 62.3% in March, the highest level since 2002. With much of the bad news possibly priced in and these improving metrics, there could be buying opportunities emerging for Japan.
Daryl Liew is head of portfolio management at REYL Singapore
• Rising corporate return on equity
• Cheapest developed market, on average
• Impending sales tax hike
• Poor demographics