Japan, the land of the rising sun, has seen many false dawns.
As Charles Gave said this week, ‘Japan has been a reliable source of disappointment for investors for more than a quarter of a century’. However, there are reasons for optimism and pockets of strength, with some areas of genuine inflection.
The Global ‘reflation’ theme has not been lost on Japan. In fact, Japan the country who has had the longest deflation adjustment is seeing signs of inflection, at least in the short term. Private sector growth is outpacing government for the first time in 20 years and the yield curve is no longer inverted. Profits are growing faster than GDP and are coming of lows.
Cash piles remain high and not only are we seeing a genuine change in company willingness to return cash but also an uptick in capital spending. In addition, it is often forgotten that Japanese profits have a high correlation with global trade. The latter has been in the doldrums throughout the post GFC cycle but is now showing signs of bottoming and Global PMIs point to a strong re-acceleration in trade.
The R squared between the Topix stock market and the US 10 year is 0.89, hence any continued acceleration in US growth and inflation expectations will continue to help Japanese shares and the Topix Price to Book tracks US Treasury yields very closely.
Cashflow is growing at 14% per year and the BOJ continue their ETF buying. Abe is the most popular leader in 3 decades and with foreigners having dumped 40% of their Abenonomics buying, it means the market is not overbought.
Anu Narula - Head of Global Equities - Mirabaud Asset Management