Given the robust corporate fundamentals, the valuation of the Japanese equity market is not expensive, even after the strong rally that began at the end of October, said Shogo Maeda, head of Japanese equities.
Having witnessed strong growth in corporate earnings from April to September, when Japan’s GDP declined sharply, Schroders said it expects further upward revisions in corporate earnings with a large push from the recent yen weakness.
“More importantly, we have been encouraged by the strong momentum in improving corporate governance in Japan. We have seen an increasing number of companies announcing share buybacks to reduce their cash pile and improve return-on-equity,” Maeda said.
The Japanese market surged to a seven-year high during the first week of November following the expansion of the stimulus programme and the decision by GPIF, Japan’s $1.2trn pension fund, to raise equity allocation targets.
Since then, volatility has increased.
“This [volatility] has primarily been driven by short-term investors and therefore the risk of short-term profit-taking towards the end of year may need to be monitored carefully.”
Growth execution key
The decision to postpone a second consumption tax increase to 10% (from 8%) to April 2017, originally planned for October 2015, comes amidst negative growth for the Japanese economy.
“Two consecutive quarters of negative GDP growth, which Japan has experienced since the increase of consumption tax last April, had not been expected.
“His [Abe’s] decision to call a snap election in the lower house has been a concerted effort to gain public support for the consumption tax postponement and to reinforce the popular mandate of ‘Abenomics’ as a whole.”
The fund house cited concerns about the uncertainty surrounding the 14 December election as well as the delay in the progress of Abe’s growth strategy.
“We can see government debt problems and a potential exit of the Bank of Japan’s (BOJ) huge monetary easing posing issues for the Japanese economy over the mid- to long-term, but they will not add immediate risk to the market.”
A look at one-month trend of Tokyo Stock Price Index:
