The aggressive monetary stimulus program in Japan - aka Abenomics first and second arrows - has provided a compelling backdrop for strong Japanese stock performance. Indeed, year to date, the Nikkei is up 13%. While certain corners of the investment community have signalled a possible topping, or even a certain amount of froth because of this recent outperformance, one only has to look at the chart below for a better perspective of just ‘how much further we can go’. Japanese equities have had a tough twenty years, mostly languishing in the backseat with most major comparables repeatedly breaking new all-time highs. The Nikkei - at around the 20,000 level now - is barely half of where it was in the early 1990s.
On the macro front, we have a huge rebuilding effort going on in the Tohoku region because of the Great East Japan earthquake and tsunami in 2011. This will benefit construction and related industries expanding into this region. The remilitarisation of Japan has also begun, leading to demand for heavy machinery and logistic suppliers. Japan was the first major economy to enter deflation and had been held there for over 10 years. Through this period, companies there have become leaner, more productive and efficient. The lower yen has also allowed Japanese companies to better compete on the international front. Domestic consumers too, are finally offered a glimpse of job security with even anecdotes of improving wages told. This has all led to pent-up demand by local consumers in both consumer durables and discretionary goods. Through this period also, new industries and companies have emerged, taking prominence in their respective fields. For example, in the high-end technology and e-commerce sector, Softbank and Rakuten are leaders others try to emulate. Furthermore, companies like Uniqlo (fast retailing) and Daiso - ironically borne out of the recessionary/deflationary years - have learned how to squeeze efficiencies allowing them a competitive edge not seen coming from Japanese companies for donkey’s years! Lifting off?
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