Japan equity: top performer in 2023, remains an attractive option for 2024
Wednesday 21 February 2024
Amundi Convictions
February 2024 | 3 minute read
Japan equity: top performer in 2023, remains an attractive option for 2024
| KEY TAKEAWAYS
Risks to these arguments are primarily linked to the Yen. |
Japan’s ongoing equity revival
2023 has been a really strong year for Japan equity, reaching its highest close in almost 34 years. The TOPIX1 surged by +25% in 2023, outpacing the MSCI ACWI2 by +5%. While future gains may not match 2023 returns, the overall outlook should remain positive.
The arguments supporting a positive stance may remain valid
Firstly, earnings growth in Japan remains attractive, especially when compared to other developed markets. Although the current forecast for the TOPIX in 2024 is lower than the one for the MSCI ACWI, there is a good chance of these numbers being revised upwards. Looking at the Yen, its decline versus the USD supported market performance in 2023; despite this would likely not replicate in 2024, domestic economic growth should remain strong.
Secondly, reforms initiated by the TSE in March 2023 would continue to produce positive effects in 2024. These reforms aim to improve capital efficiency, targeting listed companies with a price-to-book ratio (P/BV ) below 1x. Indeed, a large number of companies in Japan are urged to enhance their P/BV3 by March 2025, thereby improving their return on equity (ROE4).
Lastly, the projected positive trend in terms of wage growth and inflation should sustain a rerating5 . Price-to-earnings (P/E6) ratio, kept low by deflation, has now reverted to its 12-year average; in addition, spring wage negotiations are expected to lead to pay rises.
However, this scenario presents some risks, mostly related to the Yen. A strong Yen might alter the inflation trend, impacting equities' performance in local currency, profits and valuations.
Japan’s macro and currency scenario
| Macro |
Volatile yet above-average growth is expected, driven by exports and business reshoring7. Strong earnings, high-capacity utilization, and labor shortages should bolster this trend. Private consumption should recover gradually alongside improving wages and price dynamics. The new core consumer price index (CPI), excluding fresh food and energy, eased to 3% YOY in January from a peak of 4.3%. Softening inflation expectations and underlying measures would suggest reduced inflationary pressures, but not a return to deflation. Core CPI is forecasted to rise by about 1.5% annually in Q4 2024 and 2025, signaling sustained moderate inflation. |
| Central Bank |
The Bank of Japan (BoJ) maintained its negative interest rate policy (NIRP) in January. It may opt to normalize its monetary policy with a 0% terminal rate, delaying rate hikes. According to Amundi’s views, the ideal window for a policy adjustment in Japan is after May, following the expected easing measures from other major central banks. |
| Currency |
The Yen might strengthen due to several factors:
However, these factors are dependent on investors unwinding carry10 positions. With the BoJ unlikely to initiate a proper hiking cycle, US rates and global growth will play a pivotal role. Forecasts suggest USD/JPY reaching 135 by the end of 2024, with potential for sustained broad-based JPY appreciation beyond. |
1 Along with the Nikkei 225, the Topix is an important stock market index for the Tokyo Stock Exchange (TSE) in Japan
2 The Morgan Stanley Capital International All Country World Index is a stock index designed to track broad global equity-market performance
3 P/BV is a financial ratio used to compare a company's current market value to its book value
4 ROE is a measure of financial performance calculated by dividing net income by shareholders' equity
5 Significant change in investors’ sentiment, impacting ratios such as the P/E
6 P/E is a ratio used to measure a company's share price in relation to its earnings per share
7 The practice of transferring a business operation that was moved overseas back to the country from which it was originally relocated.
8 The rate of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries.
9 The ratio between the index of export prices and the index of import prices.
10 Carry trade: a short position in yen combined with a long position in another currency.
Source: Cross Asset Investment Strategy – February 2024, available at https://research-center.amundi.com/article/cross-asset-investment-strategy-february-2024
IMPORTANT INFORMATION
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 21/02/2024. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.
Date of first use: 21/02/2024
Doc ID: #3399775
