Re-examining the Japanese economy | Looking for Alpha
By Dina Ting, CFA, Head of Global Index Portfolio Management, Franklin Templeton Exchange-Traded Funds
Can Japan boost political and economic reform following the tragic death of former Prime Minister Shinzo Abe and more electoral victory for his ruling coalition? Dina Ting, our head of index portfolio management, shares her perspective on market drivers.
Key points to remember:
- With around 82% of its population vaccinated, Japan’s COVID-19 inoculation rate is among the highest among G7 countries.
- The yen’s fall to its lowest level in two decades could propel exports and help accelerate the rebound of its inbound travel and tourism sector as Japan eases pandemic border restrictions.
- Japanese equities are quite undervalued compared to many other developed countries, and we think the Japanese market deserves a closer look as a slice of investors’ portfolios.
It’s a somewhat suspenseful time for Japan-watchers like us as we try to assess the future of the world’s third-largest economy. Almost a decade after the Bank of Japan (BoJ) set its inflation target of 2%, the country finally hit its target at the end of May. Although spurred by rising energy prices rather than domestic demand, inflation can still psychologically lift consumers out of a long-standing deflationary mindset. Can the aftermath of former Prime Minister Shinzo Abe’s tragic demise and his ruling coalition’s subsequent election victory also mark a turning point in Japanese politics and politics? Even in this infamous graying society, there are silver linings for its economy and for investors looking to increase their exposure to Japan at this time.
Momentum in Asia
While global markets have mostly been bathed in red lately, we have seen some positive momentum in Asia. The Chinese market showed signs of improvement in June, although the short-term outlook for its stocks is one of cautious optimism. Meanwhile, Japanese stocks this year have fared considerably better than most of their developed market counterparts.
In the near term, it looks like Japan’s export prices could remain negatively impacted by ongoing supply chain constraints and rising raw material costs. However, we believe a further easing of pandemic restrictions in China – its main trading partner – should provide tailwinds thanks to significantly pent-up demand. US Treasury Secretary Janet Yellen and Japanese Finance Minister Shunichi Suzuki agreed this month to work together to improve financial stability and manage volatility in foreign exchange markets. In January, when Japan and the United States publicly reaffirmed their relationship, they went so far as to call it “stronger and deeper than at any time in its history.”
About 82% of Japan’s population is now vaccinated, representing one of the highest COVID-19 inoculation rates among G7 countries. With the yen now at a new 24-year low against the US dollar, this export-focused market could be poised to benefit not only from its manufacturing sector, but also from the rebound in tourism. The attractive exchange rate is expected to encourage the return to Japan of mainland Chinese visitors, who were the largest group of travelers before the pandemic.
According to our analysis, Japanese equity valuations are currently attractive relative to other developed markets. On a price-to-book ratio, the Tokyo Stock Exchange index is trading just below 1.2x book value, suggesting that its shares are now better valued when measured against other countries in the world. G7.
There has been much recent analysis of Abe’s signature economic plan dubbed “Abenomics”, which has yielded mixed results. The country’s longest-serving prime minister is credited with bringing Japan’s corporate governance practices more into line with global standards. Eight years ago, his administration implemented key measures to attract more foreign investment, requiring improvements such as increased risk management disclosures and independent outside directors. His successors have continued to push for these reforms and have twice revised Japan’s Corporate Governance Code, first in 2018 and again last summer to better promote diversity, particularly with respect to women. occupying management positions.
In our view, however, change may be slow in Japan and much greater change is needed. The code stopped short of setting specific goals, and Japanese women continue to lag behind the world average (27%) in their share of leadership roles (12%), according to the International Labor Organization. work.1 But before the pandemic, the government managed to enact legislation to expand childcare, reform the tax code to reward dual earners and improve parental leave policies. We are encouraged by Japan’s recent efforts to expand foreign worker immigration policies to address labor issues, as well as continued reforms to encourage and advance women into careers significant.
Abe’s legacy has also shaped the way some companies interact with investors and the broader market. Shareholder returns, both in terms of dividends and share buybacks, are indicators of these positive developments. According to Nikkei Asia, Japanese companies plan to double share buybacks to $32 billion, its highest level in 16 years and which could help boost market confidence.2
Japan has long struggled with demographics that can hold back growth. But as the International Monetary Fund (IMF) puts it, Japan is a “laboratory from which other countries are beginning to learn lessons”.3 This includes Japan’s key contributions to artificial intelligence (AI) and automation as the world’s leading manufacturer of industrial robotics.4 Despite global supply hurdles, pandemic-induced demand for integrated robotics has grown over the past two years.
Japan has also consistently ranked among more than 100 economies assessed for the World Economic Forum’s (WEF) Global Competitiveness Index and has remained one of the top competitors in global patent activity. While Japan’s venture capital (VC) space may be chasing not just Silicon Valley but Europe as well, its VC landscape was given a boost last year amid a crackdown in China’s tech sector. There is now growing support for strengthening Tokyo’s startup ecosystem, better fostering entrepreneurship, and engaging in a paradigm shift in policies to promote overall economic revitalization.
What are the risks ?
All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks, including currency fluctuations, economic instability and political developments. Investing in emerging markets, of which frontier markets are a subset, involves increased risks associated with the same factors, in addition to those associated with the small size of these markets, their lesser liquidity and the absence of executives. legal, political, commercial and social established to support securities markets. Since these frameworks are generally even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are amplified in frontier markets. To the extent that a strategy focuses on particular countries, regions, industries, sectors or types of investments from time to time, it may be subject to greater risks of adverse developments in those areas of interest than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
ETFs trade like stocks, their market value fluctuates and may trade above or below the net asset value of the ETF. Brokerage commissions and ETF expenses will reduce returns. ETF shares can be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no assurance that an active trading market for ETF Shares will develop or be maintained or that their listing will continue or remain unchanged. Although ETF shares are tradeable in secondary markets, they may not trade easily in all market conditions and may trade at significant discounts during times of market stress.
1. Source: International Labor Organization, “Gender equality in the workplace remains elusive”, 10 January 2020.
2. Source: NIKKEI Asia, “Japan stock buybacks double to $32bn, high in 16 years”, June 5, 2022. There can be no assurance that any estimate, forecast or projection will occur.
3. Source: Hong, Gee Hee, Schenider, Todd, “Shrinkonomics: Lessons from Japan”, International Monetary Fund, March 2020.
4. Source: International Federation of Robotics, “Japan is the world’s leading robot manufacturer”, March 10, 2022.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.