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Japan: the real ‘strong and stable’

In a notable contrast to the UK’s ‘snap’ election, Japanese Prime Minister Shinzo Abe was returned to power this week with a convincing win. He will maintain a large majority in both houses of parliament.

  • Japanese Prime Minister Shinzo Abe has won an emphatic victory in the General Election
  • Japanese equities have already risen a long way over the past 12 months
  • Stronger earnings and global growth should sustain valuations from here

Certainly, this was a strong mandate for the ‘Abenomics’ reforms that have seen Japan shed its deflationary cloak and its economy start to improve. Markets were cheered by the ongoing stability in the country – a distinct contrast to the US and UK. The election result prompted a rally in Japanese equities.

Chris Taylor, head of Japanese equities at Neptune, points out that the Nikkei 225 Index is now hitting levels last seen over 21 years ago, while the yen is weakening against all major currencies. The Nikkei has now posted its longest winning streak (15 sessions) in its nearly 70-year history, and has risen 16.5% over the past six months.

This kind of performance will always prompt the question ‘can it last?’. There is still good news on the economy. The BlackRock Investment Institute says: “Data point to a solid pace of growth, led by both consumption and exports, as unemployment drops to 25-year lows. Yet subdued inflation should keep the Bank of Japan extra loose on policy. Our BlackRock Growth GPS for Japan shows growth should hold up at levels well above trend.”

Will this translate into stock market strength? Taylor believes the market still looks cheap in spite of its recent performance. He says strong earnings updates have driven the Japanese market’s price-to-equity ratio from 13x to nearer 10x, making it the cheapest across most of the developed and emerging markets.

Earnings growth has been remarkable, with over 70% of results beating companies’ own forecasts. At a time of synchronised global expansion, Japan’s exporters have some natural advantages. BlackRock believes that a number of sectors look particularly good value and is prioritising those companies that have posted solid earnings but lagged the broader market, such as autos, transportation and real estate.

Taylor suggests that Japan may be next in line for a rotation from international capital. To date, Europe has been the main beneficiary of disillusionment with US markets, but as quantitative easing starts to be withdrawn and the economic recovery starts to mature, investors may start looking for an alternative. Japan may prove to be the answer.

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