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Japan

Japanese equity Market Returns     Q3         LTM

Nikkei 225                                             8.1%      18.5%

TOPIX                                                     5.9%      10.8%

MSCI Japan Smallcap Index               2.4%       8.3%

Summary

  • Japanese household spending hits 3-year high
  • Jobs market is extraordinary tight
  • Prime Minister Abe secures third term
  • Japanese equities advance despite trade as Yen falls

Japanese household spending increased by +2.8% in third quarter, hitting a 3-year high. A strong bonus season for Japanese workers coupled with a rise in base pay by +1.4%, the highest level since 1997, caused a surge in spending in the third quarter. This follows a strong second quarter real GDP print of +3.0% annualised, beating consensus estimates. It was the fastest pace of growth since the first quarter of 2016.

Jobs market is extraordinarily tight. The jobs per applicant ratio of 1.63x is the highest since 1974, supporting further wage growth. To increase supply in the jobs market Japan have started to increase skilled immigration. Japan have a poor history of attracting or welcoming skilled labour however given labour market tightness and weak demographics skilled foreign workers are much needed. Japanese commercial banks also continue to expand credit, in stark contrast to the deflationary period of the 90’s and 2000’s, credit expanded at a pace of +2.3%, a modest number but higher than previous years.

Prime Minister Shinzo Abe secured a third term as Liberal Democratic Party leader is set to become the longest serving Prime Minister in Japanese history. Despite political challenges and numerous scandals, PM Abe secured a commanding victory in the recent election. The political stability in Japan is welcome amidst the political turmoil globally and provides improved visibility on government and central bank policy for the next three years for foreign investors. The Japanese and US have agreed to begin negotiating a new trade agreement on goods, with the market reacting positively to the decision not to impose additional tariffs on imported automobiles.

Japanese equities advanced despite rising trade tensions. Japan’s equity market ended September with solid gains, shrugging off concerns about trade tensions. The Yen weakened to Y113 against the US dollar which was supportive of Japanese equities over the quarter, give the large export component of the Japanese market. The weaker Yen pushed expectations for corporate earnings growth higher and helped lift the broader market.  Commodity-related stocks were among the strongest performers, reflecting gains in crude oil prices. Conversely, small-cap growth stocks were visible laggards.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” - Paul Samuelson