Charlie Macquaker, Executive Director – Investment at Walter Scott & Partners
Investors have taken a more optimistic view of Japan for most of this year, with the economy staging a rebound from Covid-related lockdowns.
Although second-quarter GDP was revised down from an annualised rate of 6% to 4.8%, this rate of growth was nonetheless reflective of an improvement in export performance and an increase in inward tourism, with the removal of travel restrictions in China boosting visitor arrivals.
The weak yen, a function of the Bank of Japan’s benign neglect, has helped the country’s export competitiveness. In contrast to Europe and the US, monetary policy in Japan has remained in stimulus mode, aside from recent alterations to the central bank’s bond-buying programme. The BoJ currently believes that inflationary pressures remain largely transitory, although there is speculation that with wages rising and inflation showing few signs of ebbing just yet, the bank may be forced to alter course more aggressively.
There have been hopes that the country may now be shaking off the shackles of chronic deflation. There are problems, however. Rather than demand-led inflation, a lot if it has been of the ‘cost push’ variety. Although wages have been rising in Japan, inflation has been crimping personal consumption, and indeed companies have had to tackle the issue of rising costs in some areas.
It is also the case that while Japan’s export competitiveness has been helped by a weak yen, the tepid post-Covid recovery in China and broader external macro headwinds have featured in the narratives of a few companies. Consequently, the economic buoyancy of the second quarter will be a hard act to follow.
However, investor sentiment has remained broadly positive for most of the year, and has been further bolstered by government, institutional investor and indeed Tokyo Stock Exchange moves to improve corporate governance and shareholder returns.
As longstanding investors in Japan, we have seen the ebbs and flows of equity market sentiment, with promising economic and governance changes often followed by false dawns.
We have a simpler view – Japan has always been home to many of the world’s leading companies, such as those in fields of automation and electronics, that are able to compete and thrive on a global stage, irrespective of Japan’s vagaries.
Walter Scott & Partners, part of BNY Mellon Investment Management, is a global equity investment firm with $73.8 billion in assets under management.
