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Article07 Mar 2024

Japan’s Comeback Continues

Asia Pacific Strategy

The likelihood of the Bank of Japan raising rates has increased, which is likely to boost the yen.

Key Takeaways

  • As Japanese equities reach record highs, investors are worried about Japan running too far too quickly. We believe the major structural trends and earnings growth continue to support the market.
  • Preliminary data showed that Japan might have entered a technical recession in 2H 2023. But new data from corporate financial statements reversed that result and actually showed a capital spending boom in 4Q, while consumption was also stronger than the initial GDP estimate, showing that businesses and households are optimistic about growth.
  • Amid ongoing wage negotiations, CPI inflation remained stickier than expected, while the labor market stayed tight. The likelihood of the Bank of Japan raising rates has increased, which is likely to boost the yen.
  • Governance reforms also continue to make progress, as more companies untangle cross shareholdings, sell non-core assets, and improve capital efficiency. Investor inflows also persist, particularly as China’s prospects become more challenged.
  • Corporate earnings and revenues continued to make new highs. Though valuations have risen, they remain well below that of the US across most sectors. The last comparable period when earnings were growing strongly and valuations were at similar levels was in 2005, which was still two years and 26% away from the market peak of 2007.

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