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What lies ahead for Japan Equities in 2022?

What lies ahead for Japan equity in 2022?

In 2021, Japan’s recovery lagged behind that of other developed economies. However, following a sharp turnaround toward the end of the year, Japan’s economy is expected to expand in 2022. The Bank of Japan (BOJ) upgraded its forecast for fiscal year (FY) 2022, that is starting in April, to 3,8% from 2,9%. For FY2021 the central bank downgraded its growth forecast to 2.8% from 3.4%.

As per Archibald Ciganer, Portfolio Manager at T. RowePrice, macroeconomic policies, regulatory improvements and robust government support have led to a partial economic bounce back.

Fears of an economic slowdown have abated, according to the portfolio manager, especially since Prime Minister Fumio Kishida secured a solid majority in November 2021. The new government approved a larger‑than‑expected stimulus package in November, around $490 bn. “By carrying out the stimulus package with a sense of urgency, Kishida hopes to rebuild Japan’s pandemic‑hit economy and put it on a growth path as soon as possible,” Ciganer wrote in a recent market insight.

Japan’s digital reform to support growth

Another crucial role in addressing economic recovery according to Ciganer, plays Japan’s new Digital Agency, which begun operation in September 2021. Especially because Japan is a laggard in the use of digital technology to carry out national policies. “The use of digital technologies more extensively has the potential to contribute to economic growth through improved productivity across both the public and the private sectors, and the Digital Agency could help set a standard for innovation,” says Ciganer.

Additionally, Japan’s success in upping vaccination rates has boosted expectations that the nation could be finally out from the Covid-19 led economic dampening. Japan’s Covid-19 vaccination program caught up in May and now the percentage of the population fully vaccinated lays at 80% of Japan’s 126 million people and is higher than the US (62%) and European (71%) rates.

But there are still uncertainties following news of the Covid-19 Omicron variant. However, Richard Kaye, Portfolio Manager at  Comgest, believes 2022 will be a strong year for Japanese corporate earnings growth despite fears over the Omikron variant.

“Most Covid-19 restrictions have been lifted in Japan and as such investors should anticipate a strong recovery in the country, especially for companies likely to benefit from increased consumer spending,” says Kaye.

Japan Equities: “What you see is what you get”

Kaye also expects 2022 to be the year “inflation really takes off”. “If so in our view Japan might prove a refuge. Japan’s lack of inflation since the 1990s, despite the central bank’s gargantuan liquidity programmes, reflects its aging population and diminishing propensity to consume. For global investors concerned that the gap between reported and real earnings if inflation is here to stay, we believe Japan offers a safe haven: what you see is what you get,” says Kaye.

Japan’s inflation is historically low. The central bank just revised  its projection upward from 0.9% to 1.1% for the fiscal year starting in April.

Kaye further expects the Japanese equity market to “remain a very strong platform to supply the needs of emerging Asian consumers and industry”, citing Japan’s geographical, historical and cultural proximity as reason. Japanese companies therefore could benefit from the Asian market, and at the same time avoid the vicissitudes stemming from regulatory change, liquidity, shorter listed history or corporate governance. “For example, Pigeon, a Japanese company but China’s largest baby bottle provider, benefits from the growing number of Chinese mothers using powdered milk.”

Naoki Kamiyama, Nikko Asset Management’s Chief Strategist, also expects Japan Equities to gather momentum in 2022. After gaining a little less than 5% in 2021, he believes the Nikkei could be on course to rise more than 10% this year.

Japan “poised to address issues” that weighed down equity market

According to Kamiyama, the key reason for market’s 2021 underperformance was the limited scale of the government’s stimulus, that was unable to significantly boost domestic demand. Another factor he names was Japan’s slow response to the pandemic, with healthcare system barely keeping up with the surge in infections in 2021.

However, “Japan appears poised to address the issues that weighed down its equity market in 2021,” says Kamiyama. He names the November fiscal package as one measure already taken.

Furthermore, Japan’s exports will play a key role in boosting the economy and in turn allow the equity market to extend gains in 2022, says Kamiyama. “Thanks to strong demand created in the US as a result of Washington’s robust fiscal stimulus policies, Japanese exports (excluding the effects of currency exchange rates) recently saw the strongest growth since the Global Financial Crisis. If US demand remains robust in 2022, we may finally see Japanese companies use their excess cash to increase the production of export items.”

Kamiyama is also enthusiastic about the Tokyo Stock Exchange (TSE)’s rearrangement move which is anticipated to improve the bourse’s worldwide competitiveness. In April 2022, the TSE will reshuffle its market divisions into three new ones: Prime, Standard, and Growth.

“The changes may not result in TSE-listed companies going through an overnight transformation, but we expect the reshuffle to introduce steady, long-term positive change by encouraging firms, particularly those in the Prime segment, to increase the diversity of their boards (especially external directors) and further unwind cross shareholdings,” says Kamiyama.