The biggest influence on the Japanese market, he said, is foreign investor confidence, which is tied to the value of the Japanese yen.
Over the last 12 months, the yen has fallen 5.5% vs the US dollar and about 5% vs the euro, according to data from FE Analytics.
As a crude measurement, Murray estimates every 5% depreciation in the yen roughly equates to a 40% increase in Japanese quarterly profit at the top listed companies.
“Japanese profitability is heavily geared to a weaker yen and that is closely tied to foreign investor confidence,” Murray said.
Efforts aimed at structural reform of the economy, however, have been lame, he added.
“A jobs plan raised a few weeks ago recognizes the constraints the Japanese economy faces, but it was just a plan that needs approval and then implementation. If it’s approved, many of the measures will take several years to take effect.”
That said, some shorter-term measures could impact the market. The government is considering a corporate tax reduction to 13%, which would be beneficial, Murray said.
In addition, Japan’s $1.1 trillion Government Pension Investment Fund (GPIF), may make some allocation decisions this year. GPIF has been under government pressure to adopt a broader investment strategy in order to meet pension obligations, given Japan’s aging demographics.
“The talk is GPIF shifting about 5% [of AUM] into equities or roughly $60 billion. Relative to market capital it’s not that great, but it may be a signal for other investors to buy.”
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Japan’s stock market is down from highs in January, but still up 13.75% over the last 12 months.
