21 June 2021 /
Global Market Outlook, Our thinking
As the global economy recovers, Japan stands in the spotlight
Archibald Ciganer
Portfolio Manager T. Rowe Price Japan Equity Strategy

Upbeat outlook as Japanese market is highly geared to global recovery.

Key insights

  •  
  • The outlook for Japanese equities appears favorable at the current stage of the business
    cycle.

 

  • The cyclical nature of the Japan equity market means it is highly leveraged to a prospective recovery in global demand.

 

  • Ongoing structural market reform and the acceleration of secular growth trends add to the
    optimistic outlook for Japan through 2021 and beyond.

While Japanese equities made solid progress during the first half of 2021, the TOPIX gaining 8.52%, year-to date (as of May 28, 2021), performance has ultimately disappointed, with Japan trailing other major equity market returns. This is partly due to Japan’s strong outperformance in 2020, but also reflects idiosyncratic issues, such as the slow roll-out of the coronavirus vaccine and, more recently, the imposition of localized lock downs in certain prefectures, including Tokyo.

The dominant market theme during the first half of the year has been the ongoing market rotation, out of growth stocks and into value, that began toward the end of 2020. This trend accelerated in earnest from February, with the arrival of the Pfizer coronavirus vaccine. Having been delayed in Japan, the rollout of the vaccination boosted hopes of an economic reopening, encouraging investors to rotate into cyclical value companies at depressed prices.

“We remain positive about a number of secular growth areas that offer potentially open‑ended, long‑term growth opportunities.”

Meanwhile, expectations that the vast amounts of fiscal and monetary stimulus provided by governments around the world would inevitably prove inflationary also saw investors rush to take profits on growth stocks in favor of value and lower‑quality cyclical stocks.

Early cycle value areas like banking and autos and, most notably, commodity‑related sectors, have significantly outperformed in 2021 (Fig. 1), as investors have poured money into these areas to try to take advantage of depressed stock prices. However, while the market rotation has been severe, we also believe that it is largely played out, as prices have risen to more “normalized” levels.

We remain positive about a number of secular growth areas that offer potentially open‑ended, long‑term growth opportunities. Many companies in these areas are currently at the lowest valuations seen in years. These are innovative, resilient businesses that have been able to sustain high returns on equity and are well positioned to grow market share over a long‑term horizon. Indeed, the global pandemic has accelerated secular growth trends that were already in place in Japan, such as factory automation, e‑commerce, digitization, e‑health, fintech, and environmental technologies. At the same time, competitive dynamics have also improved – meaning well‑positioned, resilient businesses are likely to emerge even stronger.

Budgetary and monetary support remain accommodative

In August 2020, Japan’s longest‑serving prime minister, Shinzo Abe,
announced his resignation due to declining health. The sudden announcement raised fears that Mr. Abe’s transformational “Abenomics” program of economic and regulatory reform would also come to an end. However, Mr. Abe’s long‑serving Chief Cabinet Secretary and right‑hand man, Yoshihide Suga subsequently won a landslide victory in the ruling Liberal Democratic Party’s leadership election, assuming the prime ministership in the process. This not only provided political continuity and stability in Japan, but also ensured the continuation of the Abenomics structural reform program.

Since taking the helm, Mr Suga has stepped-up government spending and structural reform efforts, and maintained the focus on economic growth as Japan’s number one priority. Mr Suga has also pledged to cut greenhouse gas emissions to net zero by 2050, vowing to transform Japan’s policy on coal-fired power generation and boost innovation in renewable energy. Elsewhere, the Governor of the Bank of Japan, Haruhiko Kuroda, has reiterated the Bank’s commitment to maintaining ultra-easy monetary policy.

“…we believe the anticipated global economic recovery will continue to build and broaden through 2021 and beyond and that we will slowly return to some semblance of ‘normalization.’”

Domestically, Japan’s Diet approved a record JPY 106.61 trillion (USD 976 billion) budget for the 2021 fiscal year to help mitigate the fallout from the coronavirus pandemic as well as rising social security and defense costs. The Bank of Japan published a review of its policy tools, signaling that it will keep easing measures in place for a prolonged period and continue with its “yield curve control” strategy, but with added flexibility.

On the economic data front, a better‑than‑anticipated gross domestic product report showed the Japanese economy growing at a 12.7% annualized pace in the fourth quarter of 2020, supported by strong exports (particularly to China), consumption, and capital expenditure. This augurs well for Japan’s cyclical market, with corporate earnings highly levered to the health of the global economy and export demand (Fig 2).

Key factors to watch in H2 2021 – vaccines, lockdowns, and the Olympics

Despite its densely populated cities and an aging population, Japan has managed to broadly contain the spread of the coronavirus and keep the mortality rate relatively low. That said, Japan has recently seen an acceleration in the numbers of coronavirus infections, with a state of emergency having to be declared in certain districts. While this is a worrying setback, it is worth noting that the current situation is less restrictive than lockdowns in Europe and the US, or even Japan’s own spring 2020 lockdown. Currently, just four prefectures (of 42) are facing curbs and curfews in the evening. Japan has dealt effectively with previous waves of the coronavirus much better than most of the world, but it would do well to arrest this latest outbreak ahead of the Tokyo Olympics, which the government and authorities are keen to proceed with. Given the success with which Japan has dealt with previous waves of the pandemic, and the fact that the vaccination program is accelerating rapidly, we expect the current flare‑up to be dealt with effectively.

Moving forward

The path to economic recovery is beset with uncertainty, depending on progress of the vaccine rollout, the potential for ‘new waves’, and the effectiveness of the public health responses to these outbreaks, both domestically and worldwide.

That said, we believe the anticipated global economic recovery will continue to build and broaden through 2021 and beyond and that we will slowly return to some semblance of ‘normalization’. Given Japan is one of the most cyclical and open markets – highly levered to the health of the global economy – we believe it will be a major beneficiary of the prospective global recovery. Certainly, the rapid economic recovery evident in China, Japan’s major trading partner, represents a significant tailwind.

As we enter the next stage of the equity cycle, amid a broadening domestic and global economic recovery, we continue to believe that Japan is a compelling active management case, particularly as the market is under‑owned, continues to undergo governance reform and improvement, and displays positive change dynamics.

ID0004316 (06/2021)

202106-1673010

Sign up for Global Equity insights from T. Rowe Price
Share this article:
Share on linkedin
Share on email

Important Information

The specific securities identified and described are for informational purposes only and do not represent recommendations.

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. 

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction. 

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. 

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

EEA ex-UK–Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.

Switzerland–Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.

© 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

Our thinking
Multi-Asset_Solutions_EMEA_11_Jan_2021_600x600px
Insights

Weekly market recap

Read Time: 10 mins Yoram …

400-04276965_2000x1000px[62]
Our thinking

The cycle – where are we? Implications for global equity investors

Read Time: 5 mins David …

AdobeStock_42173823417_2000x1000px
Global Market Outlook

Gains still to be found in Chinese equities

Read Time: 6 mins Wenli …

Our global equity capabilities

Explore our range of strategies available to

you and your clients

Thank you for registering for global equities updates. The latest insights will be sent straight to your inbox, in the meantime see our latest thinking:

Important Legal Information

This site is intended for investment professionals. I have read, understood, and agreed to the terms and conditions detailed below and confirm that I am either an investment professional within the EEA or qualified investor within the meaning of Swiss collective investment schemes law with domicile in Switzerland, and that I will not pass on any information on this website or downloaded from this website to third parties.

Important Legal Information

By accessing this website, you consent to T. Rowe Price collecting information by way of cookies. To find out more please read our cookie policy.

Information contained in the T. Rowe Price website is not intended for investors in any jurisdiction in which distribution or purchase is not authorised, including the jurisdiction of the reader of this information, where applicable. For example, the information herein is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of United States persons.

Information obtained from this site is intended specifically for the individuals who have agreed to these terms and conditions and may not be redistributed without prior consent from the T. Rowe Price Legal department.

The information on this website has been prepared for information purposes only and does neither constitute investment advice or other advertisement or recommendation nor an offer or solicitation to purchase or sell investment instruments, to effect any transaction or to enter into any legal relations. The investment instruments described may not be available to or suitable for all investors. You should consider, if appropriate, obtaining independent professional advice before making an investment decision and be aware of local laws governing investments.

For EEA

The information is designed for professional investors, including financial intermediaries or members of the media, and is published for informational purposes only. In particular, the information is directed at only informing persons falling within one or more of the following categories:

(a) A government;

(b) A bank or insurance company;

(c) A pension fund or charity;

(d) Persons whose ordinary activities involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purposes of a business carried on by them or whom it is reasonable to expect will, acquire, manage or dispose of investments for the purpose of such a business;

(e) Persons whose ordinary business involves the giving of advice, which may lead to another person
acquiring or disposing of an investment or refraining from so doing;

(f) Representatives of the media for corporate and background information about T. Rowe Price.

Persons who do not fall into one of the above categories should not act upon the information contained herein.

Unless otherwise noted, the content appearing in this Section of the T. Rowe Price website has been issued by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier.

For Switzerland

This website contains advertising.

The information in the T. Rowe Price website is exclusively directed at qualified investors within the meaning of the Federal Act on Collective Investment Schemes (‘CISA’) and its implementing ordinance as well as according to the most recent interpretation of the Swiss Financial Market Supervisory Authority FINMA with domicile in Switzerland.

In particular the following are considered qualified investors within the meaning of CISA: supervised financial intermediaries (e.g. banks, securities dealers, fund management companies), supervised insurance institutions, public entities and pension schemes with professional treasury management, enterprises with professional treasury management, high net worth individuals who have elected in writing to be deemed qualified investors and independent asset managers who have declared in writing that they will be using the information herein only for clients that are qualified investors.

Issued by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland.