Japan: yet another new era

Another year, another prime minister in Japan. The past four decades have seen 21 prime ministers in the land of the rising sun. Yoshihide Suga, 72, announced plans to resign in September, after failing to control the country’s coronavirus surge and telling reporters that he didn’t have the energy to campaign for the September election as well as implement measures to contain Covid-19.

Fumio Kishida, who was appointed leader of the country’s Liberal Democratic Party in September and led the party to electoral victory at the beginning of November, was generally welcomed by markets. “He has acknowledged a failure of past economic policy to bring prosperity to a wider spectrum of society,” says Jim McCafferty, joint head of Asia Pacific equity research at Nomura. “He has spoken about a ‘virtuous economy’ which would entail a rise in income for a broader range of people.”

Kishida has endorsed a cash handout programme of US$880 (£666) to every family with children. The idea is that younger people might spend rather than build excessive savings. McCafferty says that in his first parliamentary policy speech Kishida used the word “distribute” on 12 occasions, which might suggest tax rises, but his party is “strongly pro-business” and is unlikely to be supportive of taxes on corporates.

In the meantime, Nomura expects real gross domestic product growth of 2.6 per cent this year and 4.3 per cent in 2022. The Japanese financial group downgraded its 2021 growth estimate recently by 1.1 per cent to reflect a slump in private sector consumption due to a fifth wave of Covid infections and constrained exports and capital expenditure owing to semiconductor shortages and supply-side constraints. But this fifth wave was the first time Japan had seen infections truly spike, and population vaccination levels are higher than in Western nations.

“On the whole, the Japanese economy has navigated Covid reasonably well perhaps aided by the financial strength of its listed companies,” McCafferty says. However, stock market performance has been disappointing. The MSCI Japan index increased 6.4 per cent for the year to 3 December in sterling terms, compared with 11 per cent for MSCI UK and 25 per cent for MSCI USA. 

While predicting the stock market with any precision is a dangerous game, Nomura expects the Nikkei 225 – the Tokyo Stock Exchange’s lead index – to touch 32000at the end of June 2022 and settle at 31000 at the end of December 2022. That equates to increases of 14.2 per cent and10.6 per cent, respectively, on its 3 December level this year. 

This is down to a number of supporting factors: inflation is less of a threat in Japan than in other markets such as the US and the UK and a degree of price growth would be welcomed given policymakers’ continued attempts to rid the countryof deflationary pressures. Share buyback activity in Japan is at a 10-year high and capital expenditure levels are strong, suggesting high levels of business confidence. Valuations are also modest. MSCI Japan had a 12-month forward price/earnings ratio of 15 times at the end of October, compared with 19.5 times for MSCI World. 

Darius McDermott, managing director of Chelsea Financial Services, says he is “neutral” on Japan. While its stock market hasn’t performed as well as other world stock  markets over the past three years, he says it “is home to some very good, world-class companies – companies that also tend to list earlier than in other countries because of the culture: it’s seen as being prestigious to run a listed company there”.  

McDermott says he likes Baillie Gifford Shin Nippon Trust (BGS), which hasn’t had a good year and is down 11 per cent for the 12 months to 3 December. However, he says over the longer term “it has been superb” and “is really tapping into the smaller companies and emerging entrepreneur”.