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After witnessing a bull run in the first half of 2023 and breaching the 30,000 mark in June for the first time in 33 years, the Japanese stock market has given up some of the gains. Rising bond yields in the US and Japan, coupled with rate hikes by the Fed, triggered a correction in Japanese equities for the third quarter of 2023 (July-September).
The Nikkei 225 index declined 4.01% during the period, and according to Schroders, this is primarily due to growth stocks. “However, smaller stocks held up well, and value stocks experienced a surge,” informed the asset manager.
“There were noticeable corrections in the stock prices of higher-valued stocks. This particularly affected growth stocks, including those in semiconductor-related sectors,” added the asset manager. Among the ones that showed resilience were regional financial sector stocks, as well as energy and auto sectors.
While some opine that investor enthusiasm in Japanese equities has finally waned, others feel there’s more to the story. With low prices and strong fundamentals, Japanese equities are still appealing from a long-term perspective, as per analysts.
Japan equities are “fundamentally attractive”
As per DWS Group, the recent share price slide in Japan offers a better entry point. “We consider Japan’s stocks to be fundamentally attractive and not too expensive, especially not after the recent correction,” opines Lilian Haag, Senior Fund Manager at DWS, in a recent insight. Haag also feels foreign institutional investors should see Japan as a stronger alternative to China.
Analysts consider Japanese equities a lot cheaper when compared to other developed markets like the US, UK, or Europe. Eastspring Investments states that the long-term prospects of investing in Japan remain intact and that several undervalued Japanese companies offer good quality and stable streams of income. According to Ivalio Dikov, Portfolio Manager at Eastspring, “Lower starting valuations are supportive of likely future outperformance for the Japan market.”
Some experts also believe that the positive correlation of Japanese equities with global yields and the current scenario of high-interest rates offers value exposure to investors.
Better corporate governance increased capex boost confidence
Revamped corporate governance and surging shareholder activism have given an impetus to Japanese equities over the past year. The Tokyo Stock Exchange unveiled several corporate reforms aimed at boosting shareholder value and better capital management by corporates. One of the significant measures involves holding the companies accountable if their stock is trading below the P/B ratio of one. Such companies even face the risk of getting delisted by 2026.
Moreover, Japanese companies are increasingly undertaking capex investment for expansion. “These planned investments may help improve productivity and ultimately help lift margins, especially since corporations can still enjoy low-interest rates for financing their plans,” contends JP Morgan Asset Management.
Inflation isn’t such a bad thing
Finally, a shift from deflation to an inflationary scenario bodes well for the world’s third-largest economy. Analysts believe that Japan’s moderate inflation scenario could spur positive shifts in household consumption and boost the investment behaviour of corporations in Japan.
Most Japanese people keep their savings in bank deposits and cash. However, to protect the value of their savings from the inflation effect, they are likely to move it to the domestic stock markets. Moreover, the sticky inflation scenario also allows corporations to raise the prices of goods and services without seeing a major hit on demand.
Prospects intact despite risks of a stronger yen
The weak yen has given a boost to Japan’s export sector and tourism industry, but Japanese equities remain exposed to the risks of a yen’s gradual strengthening and fluctuations due to Bank of Japan’s yield control curve (YCC) adjustments.
JP Morgan AM doesn’t see a major impact of these factors on Japan’s stocks. “We believe that a gradual strengthening of the currency from these levels will have limited impact on corporate earnings,” the asset manager indicated in a insight.
Meanwhile, Lazard Asset Management in its current Japan Outlook foresees the correction phase, as well as the choppiness in Japanese markets, to continue for the next two quarters. However, Lazard is upbeat about the impact of the long-term structural changes, remaining “very optimistic” on Japanese equities over the medium and long term.
