Market views - JAPAN

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JAPAN

December 2009

Having coming out of recession in the second quarter, the Japanese economy continued to grow in the third quarter. Net exports were firm as overseas demand for Japanese goods continued to improve. However, it was domestic demand that drove growth, with firm consumption and a recovery in capital spending helping to support the economy.

Despite solid growth in the economy, the Japanese market has been sluggish since August, underperforming its overseas peers. If we believe recent surveys, investor sentiment with respect to Japan is worse than it has been for some years. Possible reasons for this include:

  • Many firms have been raising capital because of earnings deterioration following the global economic downturn, as well as talk of stricter capital regulations for financial companies. Fears of further equity dilution through public offerings have caused some investors to avoid Japanese equities.
  • The DPJ government party came into power in September. Some of their policies, such as the decision to stop the privatisation of Japan Post and talk of the government supporting a strong yen, have had a negative impact on the market.
  • Japan has a high and rising level of government debt, which has come into focus recently given the weak economic environment. Concerns that such high levels of debt are unsustainable may have put off some investors from the Japanese market.
  • Despite the recent growth of Japan’s economy, the economic outlook remains uncertain. A strong yen has led to concerns about earnings prospects for exporters. Falling price levels suggest the domestic economy has returned to deflation. In addition, should domestic or global economic stimulus be eased then there are concerns that the demand environment will turn downwards and Japanese economic growth could dip again.

Looking forward, the Japanese market continues to lack obvious catalysts to drive it higher. However, valuations look low relative to historic levels by many indicators following the recent fall in share prices. There has been much market commentary on the above possible reasons for Japan’s underperformance, leading us to believe that they should now be largely “in the price”. Given the market’s low valuations, its recent underperformance, and low expectations and sentiment, we feel that downside risks are limited. Should a positive catalyst become apparent we feel that the market could move higher in the near future.

Page last updated December, 2009 ID1722