Since the 1980s/90s, when the Japanese economy began to waver, it has been dangerous to call the bottom of the downturn. We have seen several false dawns whereby analysts have suggested the Japanese economy and stock market were ready for expansion. However, there is a growing opinion that fundamental changes are emerging in Japan, and the sleeping giant may be awakening.

 

Brighter outlook for the economy

 

While many countries struggle to recover from the Covid pandemic, still feeling the economic after-effects and the global impact on supply chains, the Japanese economy was boosted when restrictions were lifted in 2022. This led to an immediate increase in consumption, tourism and, more surprisingly, especially considering our recent article, upward pressure on Japanese wages.

 

JPMorgan believes this uptrend will continue with a relatively tight employment market leading to higher salaries supporting further domestic consumption. Regarding tourism, the relatively weak yen is putting Japan back on the tourism map with increasing visitor numbers.

 

Japanese inflation

 

At a time when the Western world is fighting against relatively high inflation, the Japanese authorities have welcomed a boost in domestic inflation. Early this year, Japan's core inflation rate was 4.1%, excluding fresh food and energy, the highest level since 1981, and way above the Bank of Japan's 2% target. However, this comes after a prolonged period of low inflation/deflation, which ruined the economy and severely restricted GDP growth.

 

While there is an obvious need to retain control over inflation, ensuring that it doesn't go too high, Japan is one of few countries where a relatively high inflation rate has been welcomed in the short term.

 

Record share buybacks

 

Since 2012, when the Japanese government introduced a range of new regulations to make corporate boards more independent and increased transparency, there have been positive developments in this area. One such matter involves the number of share buybacks which hit record levels in 2022 and have gone on to even higher levels in 2023. Companies are now actively encouraged to buy back stock where the share price is below the book value.

 

While the impact of share buybacks is becoming more apparent, this is not a practice which, in isolation, can lead to a revival of the stock market and the economy. The hope is that record buyback numbers in 2023 will focus investor attention on fundamentals as opposed to the recent challenging economic environment.

 

Growth trends in Japan

 

The JPMorgan report highlights several growth trends in Japan involving various sectors, such as:-

 

· Automation/robotics

· Education

· Healthcare

· Technology

· Renewable energy

· Luxury goods/prestige brands

 

It will be interesting to see how these sectors perform in the short to medium-term, especially considering that the MSCI Japan P/E ratio of roughly 14 is below the 15-year average. Economic recovery must come first before improvements in individual sector performance, but analysts are more optimistic today than they have been for many years.

 

Summary

 

Japan has provided an array of false dawns recently, with analysts eager to predict the bottom of what has been a challenging 30 years for the Japanese economy. While there are hopes that the end of the difficulties is in sight, many investors will likely wait until a more pronounced uptrend emerges.

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