Could Tokyo 2020 help Japan's prospects?

With Japan’s vaccine roll-out falling behind and its stockmarket underperforming, what do investment commentators think is the outlook for Japan?

The country had had a difficult first half of the year, disappointing expectations and its Topix index had returned 4% over the first six months compared to returns of 12% by the ASX 200 and 18% by the S&P 500.

This was the result of worse economic performance, an increase in COVID-19 cases and sluggish vaccine rollout with the country having vaccinated around 37% of its population, compared to 57% in the United States and 70% in the United Kingdom.

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According to FE Analytics, the MSCI Japan index had returned 17% over one year to 28 July, 2021, while the Topix had returned 16%. This compared to returns of 26% by the ASX 200.

Performance of MSCI Japan and TOPIX versus ASX 200 over one year to 28 July 2021

In fixed income, the Bank of Japan had scaled back its policy support and said it expected economic growth of 3.8% in the current financial year, down from 4%. However, it was hopeful of the economy rising 2.7% in the following year, up from 2.4%, as vaccine rates picked up.

Rates in Japan were negative at -0.1% which had been in place since January 2016.

Data from EFPR found there had been “modest inflows” into Japanese equity funds as the Olympic Games got underway, although there were only four Japan-specific funds available in Australia. These were Platinum Japan, BetaShares WisdomTree Japan ETF Currency Hedged, BlackRock iShares MSCI Japan ETF and Pendal Japanese Share.

Esty Dwek, head of global market strategy at Natixis Investment Managers, said: “Japanese stocks should benefit from improving sentiment surrounding the Olympics and the fact that bad news is priced in, so the second half should be stronger”.

T. Rowe Price held an overweight weighting to Japanese equities and said: “Despite year-to-date weakness and challenges in vaccine rollout, cyclical exposure should be supportive along with attractive valuations and improving global trade outlook.

“Economic data is slowly improving, especially in services and consumer related sectors. Domestic stocks are overdue to catch up with the global reflation play. Policy setting remains extremely accommodative with unspent fiscal spending expected to offer further boost to the economic recovery and vaccination pace is accelerating.”

However, it cautioned the pandemic was not yet under control and valuation de-ratings were a headwind.

In a quarterly report, Aviva Investors said it had been “disappointed” by the country’s recent performance and that it was below its expectations.

“We still expect Japan to attain pre-crisis gross domestic product (GDP) levels by the end of 2021, but the beginning of the year has disappointed our raised expectations,” it said.

“As restrictions ebb in Q2/Q3, the Tokyo Olympics should help activity, but Japanese consumers have shown an unwillingness to spend, and continue to accumulate large savings. Overall consumption remains only partially recovered, with services spending nearly 20% lower than pre-COVID.”




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