27 FEB

2018

Candriam turned overweight on Japanese stocks last summer. Since then, Japanese equities have been outperforming global and European stocks, both in local currency and in Euro terms.

Now that Shinzo Abe has secured a new mandate and Haruhiko Kuroda has been confirmed as Bank of Japan governor, we are looking for a new catalyst. The visibility on an accommodative policy mix and above-potential expansion remain supportive and more dovish than expected by the consensus.

Overweighting Japanese stocks has, so far, been a profitable bet. Since we turned overweight on Japanese stocks in July last year, the re-election of Shinzo Abe in the autumn has provided further visibility on the Japanese reflation agenda, aka Abenomics. As a result, business sentiment, including among the more domestically oriented small enterprises, has improved in recent months. The Japanese stock market responded with a 20% rally until the peak in January this year. As Japan is well positioned to benefit from the global economic expansion, we expect a second year of above-potential GDP growth (1.3% in 2018 after 1.8% in 2017).

A dovish BoJ for longer. Beyond the synchronised global growth, an accommodative BoJ should further push up reflation. The government’s nominations for the new BoJ troika (in particular, professor Wakatabe as a deputy governor) have confirmed our view that the Japanese central bank will not join other central banks in tightening its monetary policy anytime soon. While Japan is likely to declare victory in its fight against deflation, inflationary pressures remain muted, and this has led to a sharp increase in real yield spreads vs. the US. In this context, the recent rise in the Japanese Yen appears overdone and threatens to delay progress towards the 2% inflation goal.

Have Japanese corporate earnings disconnected from the currency? A strengthening Japanese Yen usually represents a headwind for equities, as exporters get hit. As the current expansion is increasingly broad-based, domestic corporate is also contributing to profit growth. Since early 2017, the robust earnings momentum in Japan has mirrored the economic improvement. The strengthening Japanese yen has not been an obstacle for improving profit growth. It should therefore come as no surprise that the Nikkei-Yen correlation has broken down in recent months.