Our Opinion: 2015

Japan : Bouncing back

Japanese stocks had a terrible summer, sliding by around 10% amid global jitters over China. But it isn’t just the state of Japan’s giant neighbour that has investors unnerved.

“Abenomics”, Prime Minister Shinzo Abe’s plan to revive the economy after two decades of stagnation, appears to have stalled. A key plank of Abenomics is a vast quantitative-easing (QE), or money-printing, programme, designed to produce inflation of 2%. The Bank of Japan has been buying around $55bn of bonds a month. That’s less than the monthly $85bn the US central bank bought under its QE programme, but in an economy three times smaller. Yet core inflation, which strips out volatile fresh food prices, has just fallen into negative territory for the first time in three years.

There is little sign so far of inflation or rising wages. In the year to July, earnings rose by just 0.6%. The Financial Times recently reported that “consumers still appear shell-shocked” by last year’s rise in the consumption tax (VAT). That “knocked the wind out of the recovery”.

Still, the gloom looks overdone. The Bank of Japan could boost its QE purchases as soon as next month, according to Capital Economics. That should mean further yen weakness, giving Japan’s exporters another boost. Meanwhile, although the structural reforms remain a work in progress, lower corporate taxes and improvements in corporate governance are bullish. State pension funds are also being encouraged to buy equities.

Japan enjoys an impressive lead in industries such as medical devices, robotics and high-performance materials. It also spends more on research and development than virtually anywhere else in Asia. On top of that, Chinese data is set to improve as stimulus measures work their way through the system. And the yen’s fall could gain impetus if American interest rates rise further or faster than currently expected.

Japan is an important part of the portfolios that we manage for clients. Capital Economics thinks the Nikkei could gain another 30% by the end of 2016. It’s a market with real potential for a bounce back.