When it comes to Japan, investors are currently asking two major questions. As an open and cyclical market, how vulnerable is the country to a global slowdown, especially as it faces rising energy prices as a net importer of energy? The second question is how the country compares to Europe and emerging markets.
Market commentary by Daniel Hurley, portfolio expert at T. Rowe Price.
Every country including Japan is in the grip of severe recession
If a severe global recession strikes, every country is vulnerable and Japan is no exception. Rising energy prices will also create unfavorable conditions. However, compared to other markets, we believe there is strong evidence that the Asian country can do better.
Japan is probably the most politically stable country in the world. After winning the lower house in October, Kishida and the LDP have won elections to the upper house to consolidate their power. He has overwhelming support to pursue most of his reforms and proposals without worrying about elections for at least three years.
This should allow them to take economically practical but politically controversial measures such as lifting restrictions on the livestock trade, opening borders and re-introducing nuclear power.
As a net energy importer, Japan is affected by rising energy prices. In the short term, however, the country is less vulnerable and there is a workable solution, as Kishida recently announced that it would order the development and construction of “next generation” nuclear power plants.
In light of the Fukushima disaster in 2011, this is a significant step forward. Importantly, it will reduce Japan’s long-term energy dependence and bring the country to net-zero emissions by 2050.
In the short term, the Kishida government plans to restart 17 nuclear power plants by the summer of 2023. The country currently relies on oil and liquefied natural gas for its energy supply. However, it is important to remember that unlike Europe, the country is less dependent on Russian energy and has a long-term solution to energy dependence and the green energy transition.
Japan Still Recovering From “Covid-Off” Before It
Japan has one of the highest vaccination rates in the world and although the number of cases is currently skyrocketing, border restrictions are being eased; Recently it was announced that the requirements of PCR entrance exam will be removed. We believe that tourists will be allowed to enter in the coming months. Given the yen’s 24-year low, demand will be high.
While Europe and the US have benefited from the Covid-off rebound over the past 18 months, we believe Japan is yet to do the same.
The focus on the pandemic, the focus on growth versus value, and the rapid decline of the yen have influenced the ongoing and very encouraging reform in corporate governance in Japan. This is a great achievement for the country that we feel is being overlooked by foreign investors.
Despite the uncertainty in the global economy, Japanese companies continue to buy back shares and return record amounts of capital to shareholders. This is a very encouraging sign for corporate health and a sign of continuous improvement in corporate governance in Japan. We believe the relentless pressures of recent times present an opportunity for long-term investors.
rating and currency
Japan will be twelve times FWD. p/e, versus the average 14x fwd. P/E.1 With trading below average in the country, we believe an economic slowdown is set in price.
If the global economy can moderate, we believe Japan has the potential to reevaluate from attractive levels. With the revival of Japan’s domestic economy and the gradual reopening of borders, the domestic company’s income will also increase.
In our view, the yen is undervalued and is trading at a 24-year low against the USD. The weak yen has boosted Japan’s competitiveness and has been a boon for exporters.
The main reason for the yen’s weakness is high US inflation. In contrast, inflation in Japan is broadly in line with the Bank of Japan’s target; He doesn’t need to raise interest rates.
The global economic outlook is uncertain and the list of countries at risk of recession or pre-existing is growing. This is certainly a tough time for investors. However, for those with deeper and broader local knowledge, there are clear reasons to be optimistic about Japan’s medium-term prospects.
The recent earnings season has been largely solid. Corporate operating margins have been boosted by a weaker yen, especially for large exporters who are currently getting several additional yen for their dollar. Except for the energy sector, Japan is one of the best performing countries in developed markets. However, the Japanese stock market follows the example of the US and particularly inflation and political background, so the macroeconomic environment is the most important factor at the moment.
The prospects for the market are not good at all, but so are the rest of the world’s markets. However, compared to other regions, Japan has a number of positive factors that justify investors taking a closer look at the country.