This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Green Shoots Emerging For Japan

By:

Associate Director of Research at WisdomTree

Japanese equity markets have lagged their developed market peers in 2021. The recent welcomed political developments discussed here, coupled with an improving earnings momentum and a weaker Yen, could set the stage for higher equity market performance in Japan next year. 

Recovery in GDP likely to commence as Japan re-opens

After remaining in lockdown for most of 2021, Japan’s 3Q GDP surprised to the downside on an annualised basis at -3.0% versus consensus at -0.7%. The decline in consumer spending was attributable to the country’s coronavirus related state of emergencies, which are now mostly lifted. Exports also suffered largely due to supply chain constraints – vehicle exports were impacted by a shortage of semiconductor components. However, given the recent elevation in vaccination rates alongside the government reopening the economy, the Japanese economy is likely to rebound in the current quarter. In addition, manufacturing companies, especially from the auto industry (which makes up 89% of Japan’s manufacturing sector), have been significantly revising their production outlook for next year, which should result in a significant contribution to growth in the coming quarters. This view was corroborated by Bank of Japan Governor Haruhiko Kuroda recent comments – amid firmness in the corporate sector, he expected an improving trend in the overall economy to become evident in the first half of 2022 when the impact of the pandemic and supply-side constraints is projected to wane. 

Fiscal stimulus in the pipeline

Last week, on November 19th Prime minister Fumio Kishida’s government, approved a larger than expected stimulus package, with record fiscal support of ¥56trn. Of which ¥32trn or 6% of GDP forms the FY2021 supplemental budget. The extensive focus on growth via digitalisation and environment-related infrastructure investments provide an important catalyst for Japanese equities. Japanese equities have historically rallied subsequent to the announcement of a fiscal package. While history isn’t a precursor of future performance. It’s worth noting that since the Abenomics era in late 2021, Japan has launched nine fiscal packages. Following which the benchmark Nikkei 225 and Topix Index had median returns of 8.7% and 9.1%, respectively, in the subsequent three months period as illustrated below. Japan’s Cabinet office estimates the economic effect of the package at 5.6% of GDP over FY 2022 while this might seem excessive, we estimate that the potential boost from the individual policies could contribute to about 2-3% of GDP. 

Figure 1: Performance of benchmark Japanese indices post fiscal stimulus announcement 

Performance of benchmark Japanese indices post fiscal stimulus announcement 

Source: Bloomberg, Morgan Stanley, WisdomTree, data available as of close 21 November 2021. Relative returns – represent the median three month % return of the Topix Index versus the MSCI World Index and the Nikkei 225 Index versus the MSCI All Country World Index. Historical performance is not an indication of future performance and any investments may go down in value

Earnings momentum to drive equities higher

Japanese companies1 have posted yet another quarter of positive earnings surprise, with a weighted net income beat of 13.4%, marking Japan’s 6th consecutive quarter of earnings surprises. Net income margins averaged at 6.7%, up 60% over the prior year. The capital goods and service sectors benefited from digitalisation and the reopening of the economy in September. Strong positive revisions from the materials/chemicals sector were helped by higher commodity prices and the energy upcycle. More importantly, company guidance has been revised higher by 9% for net income led by strong positive revisions from materials, chemicals, internet & media, semis and the capital goods sectors.

Japanese exporters lend a tailwind

In light of the above discussion, the case for Japanese equities is certainly improving with a stable political landscape, easing mobility restrictions and improving forward earnings guidance. The Japanese yen has weakened this year against the US dollar as monetary policy between these two nations diverges sharply. While the US Federal Reserve embarks on the normalisation of monetary policy, the Bank of Japan has reaffirmed its commitment to monetary easing. Japan exports more than it imports. And so, the yen’s decline should support rising Japanese exports and lend a tailwind to Japanese equity markets. 

Sources

1 represented by the MSCI Japan Index (97% of market cap reported earnings as of 16 November 2021)

Originally Posted on November 29, 2021 – Green Shoots Emerging For Japan

Disclosure: WisdomTree Europe

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

Please click here for our full disclaimer.

Jurisdictions in the European Economic Area (“EEA”): This content has been provided by WisdomTree Ireland Limited, which is authorised and regulated by the Central Bank of Ireland.

Jurisdictions outside of the EEA: This content has been provided by WisdomTree UK Limited, which is authorised and regulated by the United Kingdom Financial Conduct Authority.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from WisdomTree Europe and is being posted with permission from WisdomTree Europe. The views expressed in this material are solely those of the author and/or WisdomTree Europe and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

trading top