Despite momentum jury still out on Japan

While some are decidedly anti-Japan, there are clearly others who hold the opposite sentiment, and, in March at least, they reaped the rewards.

So, assuming that the trend is not entirely attributable to the weaker yen, as in the market rise of 2013, what is it that keeps the investment coming in?

Kerry Craig, global market strategist at JP Morgan Asset Management, highlighted attractive Japanese price/earnings as a main draw.

“The most obvious attraction of the Japanese market is the price,” he said. “Compared to many other developed markets—and its own history—it looks cheap. Even though the Nikkei 225 is up 13% so far this year, and 180% since its low in March 2009, the current forward price/earnings ratio of 18.9x is below the average of the last 15 years of 21x.

“However, unlike 2013, when market gains were accompanied by a significant depreciation in the yen, this year’s gains show no more than enthusiasm based on central bank balance sheet expansion. In fact, there could be a combination of factors at play.”

Converging winds

Craig believes there could be a number of factors at play, the first of which is Japan’s strong tide of earnings momentum.

“Japan had the strongest earnings momentum of all three major developed regions in the last quarter of 2014,” he said.

“What’s more, some 67% of TOPIX companies beat earnings expectations – the highest level in five years – and if we exclude energy companies, earnings per share grew at 8% year on year.”

“The most obvious attraction of the Japanese market is the price. Compared to many other developed markets—and its own history—it looks cheap. Even though the Nikkei 225 is up 13% so far this year, and 180% since its low in March 2009, the current forward price/earnings ratio of 18.9x is below the average of the last 15 years of 21x.

Craig outlined the Government Pension Investment Fund’s pledge to revise its asset allocation to encompass a 25% Japanese equity weighting, which equates to £40bn of new investment, as another key influence.

He said: “The Bank of Japan is also looking beyond bond purchases and is expected to invest $25bn in the domestic equity market as part of its programme of qualitative and quantitative easing. But the secondary impact is just as important.

“Even if a small portion of the $4.8 trillion invested in the domestic pension fund and insurance industry follows the money from the GPIF the effect could be quite significant.”

Reaping the benefits of a lower oil price

Like many other energy-consuming nations, Japan is a huge beneficiary of recent plummet in oil prices.

Craig expanded: “Japan imports more energy than most developed economies, at 3.6% of its GDP, but this means that it has the most to gain from the fall in the oil price, even when considering that cheap oil leads to disinflation, which is what Abe is trying to prevent.”

However, while QuotedData concurs that the impact of a low oil price is largely positive for consumer spending, particularly when combined with government pressure for higher wages, it also added a caveat.

“For Japanese consumers, the problem has been that there has been some inflation but wages have not been rising,” said the firm.

“The government acknowledges the problem and has been urging companies to award pay rises. Much will depend on the success of this measure. The other potentially significant event of the past few months has been the collapse in oil prices. The falling oil price could be a significant benefit to Japan but it also makes the 2% inflation target harder to achieve.”