Japan – land of the rising equity market

With the Japanese market now up well over 20% since its recent low, and in such a short space of time, some kind of pause or correction could be in order. Certainly so far the currency and market have moved largely on political promises alone – promises of monetary easing and fiscal stimulus which are not exactly new. Further performance in the near term will depend much on whether Prime Minister Shinzo Abe’s rhetoric can maintain momentum, and whether we get any near term surprises from the Bank of Japan.
 
Q3 corporate earnings also are unlikely to inspire in many quarters, and may cause investors to pause for thought, though in the current mood, with the market becoming more forward looking, earnings misses could be forgiven. Valuations, while no longer cheap, are still not challenging, especially factoring in the potential uplift from the currency and a better domestic demand environment. Both the US and Chinese economies appear to be on the right track, despite the US fiscal cliff (now ‘fixed’) and debt ceiling (yet to come).

Overall, we are positive on the direction of the Japanese market over the next half year or so, as the new government enacts fresh policies to stimulate economic growth and end deflation ahead of summer Upper House elections. We are also encouraged by the way stocks are beginning once again to be driven more by fundamental factors rather than reacting to the latest policy announcement or sovereign debt auction result on the other side of the world.