Japan Equities 3Q19: Lacklustre outlook

Escalating global trade tensions could weigh on Japan equities on two fronts
Chief Investment Office15 Jul 2019
Photo credit: AFP Photo

Japan equities have had a less-than-stellar performance YTD, in contrast with other major global equity markets. This was mainly due to the recent strength of the JPY, as global investors sought safe havens amid a spike in volatility driven by escalating US-China trade tensions. The BOJ has committed not to raise interest rates before Spring in 2020 as it tweaked its monetary stimulus programme. Japan equities are not expensive at 13x, but rising trade war tensions could cap their upside through weaker exports and a stronger JPY. Earnings continue to be mixed. We downgrade Japan equities to Underweight on a three-month basis. Investors should look at bottom-up opportunities in this market – we see growth opportunities in the video-gaming sector.

BOJ vows not to raise rates before Spring 2020. The Japanese central bank, for the first time, specified a date on the “extended period” for which it looks to keep rates low. Few were expecting a rate rise next year in the first place, thus diluting the BOJ’s deliberate dovish messaging. The Japanese economy has deteriorated significantly since the start of 2019 amid the rapid decline in external demand and manufacturing activities. We think the economy can skirt a full-scale recession, but the soft patch in growth will stay for the rest of the year. Our full-year GDP forecast is maintained at 0.7%, but we see downside risks due to the growing global trade tensions. We see the policy rate and 10-year yield target unchanged through this year and next at -0.1% and 0%, respectively.

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