As sure as the turning of the leaves, each year autumn finds our clients pondering which themes will dominate the Japanese market in the closing months of the year and into the next.

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.
Japan is opening up once more
After almost three years of restrictions upon foreign visitors, the Japanese government has recently abolished its cap on daily foreign arrivals and reinstated visa-free independent travel.

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.
What does a weak yen mean for Japan?
So far in 2022, the yen has lost 8% of its value against sterling, 12% versus the euro and 27% against the US dollar.2 Japan has neither a beleaguered government nor a war on its soil, so what is going on?
Outlook 2023: Why is the yen so unpopular?
Economists will, naturally, cite economics; widening real interest rate differentials account for the weakness, against the US dollar at least. In other words, the US Federal Reserve and other central banks have raised interest rates to fight inflation and in so doing have attracted capital. Meanwhile, the Bank of Japan (BoJ) has resisted calls to follow, and so capital has flowed out of the yen in search of better returns elsewhere.

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.
Are investor fears about economic growth misplaced?
Recently, we have spoken frequently to clients about cyclical concern – investor anxiety that the cure for inflation must be recession. What we have not much talked about is cyclical reality because, so far at least, the market’s worst fears remain just that. Some economic data is softening, it is true, but in Japan business confidence surveys remain “favourable” for large companies in both the manufacturing and service sectors.3

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.
A particularly uneasy equilibrium
Perhaps the market is always finely balanced, but as 2022 draws to a close it feels that the reasons for optimism and caution are in a particularly uneasy equilibrium. Optimists will focus upon the coming tourist-led bump in consumption, the boost to profits or competitiveness which comes with the weakness of the yen, and the prospect of an injection of economic vim should China finally ditch its ‘Zero Covid’ policy.

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.
1 Japan Inflation Rate – October 2022 Data – 1958-2021 Historical – November Forecast (
2 Bloomberg, November 2022
3 Shuji Tonouchi, BoJ Tankan Survey, MUFG, October 2022

The value of active minds: independent thinking

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