Japanese Equities Proving to be Rising Star

Terry Flanagan

The Japanese equities market looks like it will hold much appeal going forward for investors, and the 20% rally in the nation’s stock market since mid-November may only just be the beginning.

Exposure to Japanese equities, while hedging the currency, may be one of the best risk-adjusted trades across any asset class at present.

Japan, the world’s third largest economy, has suffered depressed markets for decades and has been somewhat of a leper of the global equity markets during this time. But with the new Japanese prime minister, Shinzo Abe, effectively committing to a policy of devaluing the yen and the Bank of Japan’s recent decision to adopt a 2% inflation target, there are many reasons to be optimistic on Japanese equities for 2013 and beyond.

“The Japanese equity market continued to rally at the start of 2013, following the bullish trend seen at the end of last year, on expectations that the new Abe government would implement his election manifesto policies,” said Masashi Oda, chief investment officer of SuMi Trust, the asset management arm of Japanese bank Sumitomo Mitsui Trust.

“Since December, when the new prime minister pledged to implement policies such as aggressive monetary easing to stimulate growth, the equity index has soared while the yen has experienced a significant depreciation.

“A weakening yen means that the Japanese equity market continues to offer attractive investment opportunities, especially in export-orientated companies.”

The Japanese government has also stated that it wants to see the benchmark Nikkei 225 index trade at 13,000 by the end of next month—after only recently surging through the 11,000 barrier. It has, though, already come a long way since bottoming out at 8,160 in November 2011.

Japan, which boasts the third-largest equity market and the second-largest bond market in the world, is also located near to thriving Asian economies such as China.

“Japan has a well-functioning capital market embracing deep liquidity and diversity,” said Noriaki Shimazaki, vice-chairman of the Japan Securities Dealers Association, a self-regulatory organization which acts as a trade body in the Japanese securities market.

“In addition, Japanese markets enjoy geographic proximity to and close links with fast growing Asian economies, ensuring that Japan and its businesses are in a position to be a big part of Asia’s growth for the foreseeable future.”

A recent fund manager survey by investment bank BofA Merrill Lynch also found that sentiment towards Japanese equities was normalizing. It found that a net 7% of asset allocators said they were overweight Japanese equities this month, up from a net 3% in January. In December, a net 20% were underweight Japanese equities.

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