Three reasons to remain bullish on Japan

This morning Japan announced a fall in GDP for the first quarter, ending a period of expansion . Despite the setback, Quilter Multi-Asset head of investment Anthony Gillham says there are still good reasons to be bullish about Japan’s prospects:

1.       Global growth

Japan is a net exporter, meaning its companies are less reliant on the domestic economy and stand to benefit from global growth in consumption. Because of this, Japanese equities act as a good proxy for expansion in global trade and consumer consumption, which have picked up despite a number of lingering geopolitical threats.

In particular, Japan’s high-tech companies make it a winner from growth in consumer tech consumption and increased penetration of mobile technology the world over.

Put simply, while GDP can’t be ignored and can have a knock-on impact on investment in business, countries with outward facing companies can benefit from global factors beyond domestic expansion.

2.       Reform

The country is still in the process of overhauling the way it does business. Historically, Japanese companies have stagnated under stubborn leadership and a lack of competition, in turn stifling growth.

Lacking appropriate levels of transparency, governance and accountability, the corporate culture has allowed scandals, like those at Toshiba, to fester for too long. Firms have suffered as a result, with Japan’s blue-chip firms failing to invest in innovation. But now investors are turning up the heat on companies, alongside the government’s package of measures designed to improve corporate governance.

Some of those cultures and behaviours are heavily ingrained and will take time to change. But as they do investors could benefit from an unlocking of potential in Japan’s sophisticated technology sectors, educated workforce and propensity for all things digital.

3.       A reflation play

Japan’s central bank has had its pedal to the metal for some time in an effort to inject some positive inflation back into the economy. Those measures began to gain traction in 2017 with a tightening labour market, and a pick-up in inflation, albeit still below the 2% target. As the government continues to provide stimulus in an effort to drive reflation in the economy it will buoy asset values, which have otherwise been suppressed by the drag effect of Japan’s deflationary environment.

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