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Japan’s economy witnessed a positive momentum in 2023 led by a renewed commitment to corporate governance, escape from the deflationary trend, and a recovery in domestic demand. Also, major indices peaked and foreign investments surged. How does this help the overall Japan outlook for the next year? Investment experts share their views.
Japan Economy
Most asset managers and investment banks expect the Japanese economy to be on a recovery path in 2024.
Nomura foresees a moderate recovery to continue until 2025, amid risks of slower growth by the second half of 2024.
According to Kyohei Morita, Chief Japan Economist at Nomura, “Inflation is also expected to decline toward 2024, driven mainly by food prices. Meanwhile, Bank of Japan’s (BOJ) view is that inflation should originate from within the country. That can be achieved through creating a virtuous cycle between wages and prices through an alignment of companies raising prices and increasing capital expenditure, resulting in wage negotiations, higher salaries and growth in real wages and private consumption.”
Also UBS sees recovery in growth for Japan after three decades of no nominal GDP growth. “…We now see signs that nominal growth is returning, with a shift in society’s expectations (social norm) of wages and prices. We call this transformation a ‘nominal renaissance’. We think a notable slowdown to less than 1% is inevitable in 2024, particularly with our US outlook, which looks for a mild recession in the middle of the year. Still, we think around 1% growth will resume in 2025 with the recovery of global demand,” predicted the investment bank.
Meanwhile, Lazard Asset Management says, “Inflationary pressures have not abated, and our expectation is for further policy adjustments toward the end of the year or in early 2024 as the BOJ marches down this path. At the same time, rising inflation expectations could lead to positive shifts in consumption and investment behaviour by Japanese households and corporations.”
Emphasising on the monetary policy outlook, Sumitomo Mitsui DS Asset Management says, “We foresee the Bank of Japan raising its key policy rate from -0.1% to 0% and eliminating yield curve control (YCC) in Spring 2024.” The asset manager also expects the central bank to confirm wage increases in mid-March 2024 before revising its economic outlook report in April 2024 amid increased probability of achieving the 2% inflation target.
Matthews Asia is upbeat about more overseas investors showing interest in Japanese markets. “I think as we progress through 2024, the Japanese opportunity will become much more well-known and will have broadened out as well. I think you’ll begin to see local investors, either through pension funds, insurance companies or directly themselves, starting to add to the market, and overseas investors also shifting money to Japan from the US,” says CIO designate Sean Taylor.
Japan Equity
Japan has been through major structural reforms over the past decade and 2023 has been a year these changes became visible.
“The implementation of capital reforms this year looks like a game changer,” says Matthews Asia’s Taylor. “Returns on equity (ROE) are improving, dividend yields are up and stock buybacks are increasing. Companies are focusing on getting rid of non-core activities, focusing more on costs, using their balance sheets better and improving governance.”
Goldman Sachs Research forecasts a rally in the Japanese equity market in 2024, led by robust global economic growth and stock market reform. It projects the TOPIX to rise about 13% to 2650 by the end of 2024.
“Continued TSE pressure on corporates to respond to its requests will lead to a further acceleration in corporate governance-related activity amongst listed Japanese companies in 2024,” opine Bruce Kirk and Kazunori Tatebe, strategists at Goldman Sachs Research.
Jupiter Asset Management speaks about the themes that are likely to define the Japanese equity markets in the coming year. “As we look forward into 2024, we should be just as alive to the continued impact of existing themes, like the capital efficiency drive within corporate Japan, as we are to the prospects of change in the government, monetary regime, and market leadership. […] If 2024 does see Japan finally emerge from negative nominal interest rates, equity investors will feel it. Most notably, a shift-up in the value of the Yen versus other major currencies will be helpful to unhedged overseas investors.”
GAM Investments predicts mid-single-digit earnings growth in yen terms for Japanese companies in the 2024 Japan outlook, followed by a further acceleration of 10% in 2025. “While this may seem modest compared to the 10-year average growth rate of 8%, there is potential for upward revisions if our bullish scenario of a more pronounced recovery in manufacturing materialises in 2024,” says Lukas Knuppel, Investment Director, Japan equities at GAM.
Japanese Bonds
Asset managers are upbeat about the Japanese bond markets on account of attractive yields if the Bank of Japan exists its ultra-low policy rates.
Fidelity International says, “Japan’s anticipated exit from ultra-low interest rates, breathing new life into the world’s third-biggest fixed income market. Over the next few years, Japan’s $10 tn-plus bond market, including both yen and USD securities, is likely to attract greater global investor interest as it provides diversification, quality, and decent risk-adjusted returns.”
Meanwhile, as per Pictet Asset Management, domestic bond yields in Japan would become more attractive. However, for Japanese government bonds (JGBs) it expects total returns after inflation to be negative in 2024.
“Investors should avoid Japanese government bonds in particular as the Bank of Japan appears set to normalise its monetary policy, ending negative interest rates in the new year before raising short-term borrowing costs over the course of 2024. We expect Japan to be the only country that will see its benchmark yields rise between now and end-2024.”
