That reference to ‘in yen terms’ is crucial, because any underlying outperformance of the Japanese equity market has been eroded away for international investors by currency weakness. The lack of upward pressure on inflation in Japan means there is likewise little upward pressure on interest rates either. Indeed, in contrast to the Federal Reserve or Bank of England, the Bank of Japan has stuck to a policy course that is every bit as loose as it was in 2021. The result of this is money being sucked out of the Japanese system and into, for example, USD-denominated assets.
As is well known, Japan has been fighting against deflation for decades now without much success. So entrenched is this ‘immovable object’ of deflation in Japan that even the ‘unstoppable force’ of global inflation has only lightly nudged prices up. This might be surprising, but imported inflation (for example energy costs, to which Japan is highly susceptible) are not as big a factor in Japan as one might think. That’s somewhat a political choice. For example, the Japanese government’s response to rising energy input costs has been to directly pay the energy companies on the proviso that they keep prices down, rather than pass costs onto the consumer. On top of that there has been very little wage inflation, as Japan’s social contract prioritises full employment on the downside at the cost of giving up higher salaries on the upside. The net result is the sterilisation of inflation in Japan.
In contrast, one area in which the Japan looks very similar to other developed markets is in the stylistic preferences of investors in its equity markets. In Japan, as elsewhere, growth assets have been strongly out of favour while high-yielding stocks (most particularly those in commodity-related sectors) have outperformed. This undeniably creates headwinds for investors, as it has done for our own Japanese Equities strategy, but fundamentally we believe the Japanese market remains an attractive hunting ground with ample opportunity to add value across a market cycle.
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A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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