Time to jump into Japanese equities: report

A blend of fiscal and monetary policies and reforms meant to give the Japanese economy a kick-start seems to be working and has improved the outlook for the country’s equity market, according to a new Unigestion report.

It notes that Abenomics, the mix of policy measures introduced four years by Japanese Prime Minister Shinzo Abe, has yielded a positive outlook for Japan’s economy based on multiple indicators.

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For one, the country’s unemployment is at a 22-year low, with more people in full-time employment. The tighter employment market is expected to have a positive impact on wage growth, according to the report.

Also, tax reduction in the corporate sector, paired with improved corporate governance, has helped earnings bounce back. And inflation is looking marginally better with stable commodity prices and a lower yen. Recent interest rate hikes in the United States are also a good sign for Japan, as a more solid economy in North America should provide support, says the report.

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“In our assessment, valuations look attractive, in particular when compared with valuation in global equities,” notes the report. “. . . Additionally, history shows that rising U.S. interest rates have tended to be supportive of Japanese equities. Such an environment tends to be associated with periods of solid economic expansion, and if the U.S. economy continues to grow and interest rates move higher, as we expect, we believe Japanese equities should find additional support from this source.”

The report also highlights some risks that could affect Japan’s economic progress, including the risk of U.S. protectionism, which could negatively impact Japanese exporters. Private sector debt is also weighing on China’s economy, putting that key trade relationship at risk. And Japan’s public debt is also a key concern as Abenomics has generated significant government debt and a large primary deficit, notes the report.

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