The topics fall into three categories: consumption, currency and the global economic cycle. Each of these has its own peculiarities but they are also closely interconnected.
Returning travellers to Japan should be keen to spend – their wallets will be full having been locked out for so long – and the weak yen (of which more later) makes entertainment surprisingly cheap.
As investors we are happy to have some exposure to areas that should benefit directly from more visitors, but otherwise we are more cautious. Japan’s increasingly aged population acts as a brake on domestic spending and, even pre-pandemic, consumption growth was anaemic.
Inflation, no longer a stranger in Japan, could also weigh on consumption. Compared to many other economies Japanese price rises remain muted – inflation hit 3% in September1 – but wages remain stubbornly low and with it the ability for higher consumer spending.
The architect of this policy, Haruhiko Kuroda, is in the final months of his tenure as governor of the Bank of Japan. When he departs, and especially if US and other global interest rates start to peak, policy may change and, if so, downward pressure on the yen would likely alleviate.
For the moment though, the yen is weak – so much so that some suggest Japan might reverse the multi-decade trend of outsourcing and begin reshoring manufacturing capacity. We’re not entirely sold on that narrative – Japan will never again be the ‘workshop of the world’ – but we do see how an environment in which companies are keen to reduce their reliance on Chinese manufacturing centres could play into the hands of Japan’s world class capital goods companies.
Perhaps paradoxically, this provides a problem for investors. Does the data suggest that economically cyclical companies are avoiding a demand catastrophe, or are they just about to walk into one?
One major economic variable will be China. Far from overheating, the Chinese economy has been strangled by its ‘Zero Covid’ policy pursued by the ruling Communist Party. Rumours of a loosening of restrictions have surfaced, though, and if that comes then a resumption of Chinese economic activity could coincide with, and at least partially offset, the dampening effects of higher interest rates elsewhere.
Whilst our view is more nuanced than some, we still think that the scene is being set for attractive returns from the Japanese market throughout next year. These won’t come easily, though, so we are conscious of the need to be patient until that uneasy tension between the reasons to be optimistic and causes for concern has finally been resolved.
2 Bloomberg, November 2022
3 Shuji Tonouchi, BoJ Tankan Survey, MUFG, October 2022
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