A recovering Japanese market is being largely ignored this year as emerging markets gain steam, according to Julius Baer’s Asia head of research.
Sentiment on Japanese equities has mostly been split in the second quarter over tensions in North Korea, Prime Minister Shinzo Abe's declining popularity and doubts over the impact of Abenomics. Disappointing results of the varied monetary policy exercises have also dampened sentiment.
Sabre-rattling in the Korean peninsula isn't helping matters in the short-term either. The Nikkei 225 saw four days of losses this week, hitting a four-month low, as North Korea tensions escalated once again. It was at 19,336 at the time of writing.
A Reuters poll carried out between 17 and 25 August found that five Japan-based fund managers ditched Japanese stocks in favour of emerging market equities.
‘I think the data is looking extremely positive in Japan. It’s being overlooked for sure,’ Mark Matthews told Citywire Asia. ‘I think it is being ignored because the EMs are gaining steam. The small business surveys, the retail sales are looking very buoyant.’
Retail sales in Japan grew for the ninth consecutive month in July, rising 1.9% year-on-year. Japan’s economy grew at an annualised rate of 2.5% in the second quarter of the year, a revision down from preliminary government estimates of 4%, but a sixth consecutive quarter of growth.
GDP figures are expected to pick up as a result of heightened government spending ahead of 2018 general elections and the 2020 Tokyo Olympics.
‘For the last few years, the lion’s share of the growth has been in part-time new jobs being created but now that’s shifted,’ said Matthews. ‘In the July numbers, for the first time, part-time employment fell and full time was rising. Full-time [employment figures] was jumping 140,000 year-on-year four months ago. Now it’s at about 700,000. That bodes well for wages.
‘Look at department stores, tourism and healthcare… sectors that cater to the domestic population because we are starting to see beginnings of acceleration in wage growth and that will translate into better consumption.’
Wage growth generally leads to more consumption, which could boost the ever-evasive inflation that the Bank of Japan is chasing. According to July numbers, inflation came in at 0.5% excluding fresh food prices, signalling seven months of gain. However, this was largely attributable to rising energy prices. Excluding energy prices, inflation came in at 0.1% in July, nowhere close to the 2% target of the Bank of Japan.
‘The 2% target of the European Central Bank, the US Federal Reserve and Bank of Japan pre-date the shale oil boom and disruptive technology through Uber and Airbnb. It isn’t realistic anymore,’ said Matthews.
The Nikkei 225 crossed the psychological barrier of 20,000 in June but rising tensions in the Korean peninsula and a relatively strong yen versus the dollar have caused outflows from export-heavy Japanese equity markets ever since.
Julius Baer is currently underweight Japanese equities.
Geopolitical tensions are causing some foreign investors to switch screens to follow Japanese government bonds in the past few days, with the yen being viewed as a safe haven.
Weekly data from Japan’s finance ministry showed that foreign investors snapped up net 1.3 trillion yen in medium-to-long-dated Japanese bonds during the week of 28 August, the third largest weekly net purchase since 2005.