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Japan

Japanese equity Market Returns        Q1            LTM

Nikkei 225                                                6.0%        - 1.2%

TOPIX                                                        7.7%        - 5.0%

MSCI Japan Smallcap Index                   8.1%       - 8.3%

Summary

  • Japanese economy stagnates & tax hike due in October
  • BOJ remain dovish stance
  • Unemployment continues to fall
  • Japanese equities move higher

Japanese economy stagnates in Q1 driven by trade tensions. Japan’s industrial output fell in Q1 at the fastest pace in almost five years, suggesting the economy will stagnate in the first quarter as manufacturers struggle with the US-China trade war, hitting Japanese exports. Economist expectations for Japanese growth are between 0.5-1.0% for 2019. The Japanese economy must absorb a planned consumption tax hike in October, which has historically been damaging for the economy. Japanese officials vow to stick to the planned tax hike however it has been delayed twice in recent years. Prime Minister Abe hopes to offset the adverse impact of the consumption tax by returning much of the extra revenue to consumers via $18bn of fiscal measures.

Bank of Japan (BoJ) vows to hold interest rates at zero until spring 2020. Inflation in Japan remains elusive despite the continuous monetary support and the ultra-tight labour market. The Abenomics programme has led to the 6 years of solid growth for Japan however the BoJ has failed to ignite inflation, with consumer prices up by only +0.4% compared with a year ago. Japan’s unemployment rate fell to 2.3% the lowest rate in 25 years. The job-to-applicant ration remained steady at 1.6x for a fourth consecutive month. The tight job market and rising wages, will help the Japanese consumer absorb the consumption tax hike later in the year, however a slowdown in consumption is very likely.

Japanese equity market return of +7.7% was somewhat muted compared to other developed markets. The Japanese Yen weakened against other major currencies, supporting the export heavy index over the quarter. However Japanese corporate earnings revisions remained on a negative trend as large Japanese export companies witnessed downward revisions to future profits as investors factored in the recent trade slowdown.

“If you would be wealthy, think of saving as well as getting.” —Benjamin Franklin