Last week the Nikkei rose to over 10,000 for the first time in over a year. Prior to this the Japanese stockmarket had been in a bear market for 13-14 years, reaching a twenty year low in April 2003, when it fell to under 8000.
What have been the key drivers behind this recovery?
Growth has been positive in Q2 of this year, showing that Japan has emerged from recession
- Exports have been strong. Japan has taken advantage of China´s explosive growth and exports to China have soared.
- Deflation has moderated and the Bank of Japan has been very proactive in trying to reflate Japan´s economy.
- The Bank of Japan has prevented the Yen from rising by selling its own currency and buying US $ assets, mainly Treasury bonds.
- Business confidence is rising as Japanese companies have been cutting costs and restructuring their businesses, allowing profits to exceed expectations.
- The strong market rally since late April has prompted heavy overseas buying, as international investors began to recognise their vulnerability in maintaining an underweight position in Japan equities.
- With the stockmarket in decline for the past 13 years, Japanese investors have been putting their money into government bonds. The dramatic fall in government bonds since June has unsettled private investors, some of which have switched their attention to equities. Institutional fund managers in Japan have stood aside from the recent
stock market rally so far.
What is the outlook for Japan?
Over the period 1990-2001 there were three market rallies in Japan. In each case however, the market failed to remain at a high level and dropped. So the main question investors should asking is whether this rally is any different from those in the past.
Why should things be different this time?
Japan´s authorities have recognised the need for reform and their efforts have proved successful so far. Exports remain strong and company´s profits continue to rise, Japan´s prospects look positive.
Is this a market worth taking a closer look at?
The current market rally has started from a much lower level than previously. Equity valuations are also much cheaper.
There are opportunities for bullish investors in Japan. It is well placed to supply to the US, due to the strong dollar against the controlled Yen and there are attractive shares available at a low cost. Shares in smaller companies which have performed well since April, still offer interesting opportunities to selective buyers.
The main risk to this brighter picture would be a setback to the US led global economic recovery, which is now the central theme for investors.
