Can Japanese Stocks Rise Again?

japanese GDP growthWith Japan now one of the worst performing equity markets this year, BlackRock’s Global Chief Investment Strategist Richard Turnill provides an updated outlook for stocks in the Land of the Rising Sun.

jprichard / Shutterstock

jprichard / Shutterstock

This week’s chart shows how Japanese companies’ inflation expectations have been steadily declining in recent quarters, amid an appreciating yen. Bank of Japan (BoJ) stimulus efforts this year – including an expanded quantitative easing (QE) program and a shift into negative interest rate territory– have failed to stem the yen’s rise and boost inflation expectations.

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Deflationary pressures have weakened market confidence in the central bank, and hurt Japanese stocks. Japanese equities experienced record outflows in April, according to BlackRock research based on exchange traded fund (ETF) flows, and Japan is now among the worst-performing equity markets this year in local currency terms, with the TOPIX index down more than 13% year to date, according to Bloomberg data.

Recent support for the market appears to be coming largely from BoJ purchases, which amount to more than 200 billion yen since April 11, our research shows.

This all begs the question: Can Japanese stocks rise again?

There are reasons to like Japan over the longer term, even as a strong yen contributes to Japanese corporate earnings downgrades. The “short Japan” trade looks increasingly crowded, Japanese stocks appear cheap (around 13x forward earnings) relative to their own history and to other markets, and Japanese corporate balance sheets in aggregate have low financing risk, BlackRock analysis suggests.

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