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The Japanese stock market has been on a rollercoaster ride since the beginning of August. While the market largely recovered from the biggest one-day drop in the Nikkei 225 since 1987, there was another slump on September 4. The recent volatility has largely been driven by external factors such as a tech sector selloff in the US, weakening economic data, and a stronger yen.
As fears of a potential US recession loom, the pressure on Japan’s export-heavy market remains elevated. Investors are cautious, questioning whether this downturn is a temporary correction or the beginning of a more prolonged bearish phase.
“Uncertainties regarding the US presidential election, the economic situation in the United States, and monetary policy in Japan and the United States remain, and the market is likely to stay highly volatile for the time being,” wrote Tetsushi Wakayama, Japanese Equity Portfolio Manager at Tokio Marine Asset Management in a recent market insight.
According to Wakayama, TOPIX’s 12-month forward EPS forecast puts the P/E ratio at 14x, aligning with historical averages, while the PB ratio stands at 1.33x, suggesting the market is neither overheated nor significantly undervalued. However, upcoming US economic data, central bank decisions in Japan, the US, and Europe, and political developments, could drive further volatility. “We should consider the possibility of a second bottom,” he said.
Kohei Onishi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, expects equities to likely rally toward the year-end once uncertainties around events, including economic data, are removed leading up to the next Fed decision.
Japan’s economy in recovery mode
DWS’s Global CIO Björn Jesch noted that Japan’s economy is transforming and recovering, with economic growth picking up. “While consensus growth expectations for 2024 have been cut from 0.8% to 0.05% in the course of the year given that globally manufacturing is recovering slowly, Japan’s growth is still expected to hit 1.2% in 2025.”
Allianz Global Investors is a little more cautious despite the positive outlook and points to the challenges in the country. “The Japanese political situation is currently in an unexpected state of flux, and it is yet to be seen if policy changes will have any impact on the outlook for the economy,” said Koji Nakatsuka, portfolio manager at Allianz Global Investors Japan.
Prime Minister Fumio Kishida announced his resignation in mid-August, and his ruling Liberal Democratic Party (LDP) will hold an election this month to select his successor as party leader and, thus, also as prime minister due to their control of parliament.
Nakatsuka also sees challenges stemming from China, saying that the possibility of contagion from the country – “where severe structural problems are currently being worked through – should not be completely dismissed.”
“Events in Japan over recent weeks have not changed the country’s fundamental investment story, in our view. They have merely made it slightly cheaper,” opined Kei Okamura, Portfolio Manager at Neuberger Berman. He sees opportunities in Japan’s small- and midcap universe. “We believe the long-term outlook will turn out to be even more exciting than the rollercoaster ride of August”.
