PSA 2018 Japan Perspective

Happy New Year and Welcome to the PSA 2018 Japan Perspective 

Overview 

•                     After a shaky start – and a shaky middle – the year 2017 worked out well for Japan and for its opinion-splitting Prime Minister. The stock market ended the year up 20%, the latest (3Q 2017) GDP numbers had the economy growing at an annualised rate of 2.5%, and the LDP romped home in a Lower House election that some pundits had viewed as a Theresa May-style misstep. 

•                     Going into 2018, Japanese corporate earnings are growing nicely, share valuations aren’t expensive, and forecasts, based on 1H performance, appear to be on the conservative side. We expect 3Q FY17 numbers to provide cheer for the market, and this could be felicitous, because the Japanese stock market does tend to struggle at the beginning of the year. A key factor here is the pattern of foreigners’ equity buying and selling. Foreigner investors were a neutral factor for the market in 2017, as they had yet to buy into a Japan economic recovery story. It will be interesting to see whether that attitude starts to change.  

•                     Meanwhile, the Japanese economy is starting to see inflation, and with producer prices on the increase, CPI should start heading towards Kuroda’s famously targeted 2% level. If the Bank of Japan were to be as reactive as it was in 2006~7, its achievement would mean raised interest rates and a capping of the stock market rally (as occurred a decade ago). However, this time we think the Bank of Japan is required to be behind the curve; allowing for growth to persist and inflation to accelerate.  

•                     If so, this should be good for the equity market index, and it may well be that we will see a stronger overall market during this period later in the year of expected moderate but rising inflation than the one we will see at the start of 2018, particularly if foreign investors do eventually start buying. This would probably spell the end of the “Quality GARP” market that we’ve enjoyed in 2017 – and can expect to continue for a bit in 2018 – as we would expect the market to rotate towards lower quality names, and generally be a broader-based market than the one we’ve experienced over the past twelve months. 

•                     For a brief period, a balanced economy of moderate growth and moderate inflation should occur. While it would be nice to believe that this period would be sustainable, the imbalances which have built up in Japan’s economy through a decade plus of economic experimentation suggest otherwise. It would not be surprising if by the end of 2018, we will be asking whether the Bank of Japan can keep these imbalances under control. 

•                     Sadly, it is too early to tell what sort of market then emerges. That will depend on how growth holds up, with the US tech bubble an example of a liquidity-driven market in a growth economy, and the Japanese bubble of the 1980s the example of what happens when it is easier to make money in financial markets than in the real world.

•                     Within this macro-driven market, industry specific issues should continue to be important to the market. Key events PSA is looking forward to in 2018 include the legalization of eSports in Japan, the acceleration of 5G wireless investment, the development of blockchain in Japan, and the commercialization of an exciting next-generation semiconductor technology, NB-FPGA.