2019 Outlook: Japanese equities

The Japanese economy is on track for strong long-term economic growth

Dec 24, 2018 | Daiji Ozawa

Key takeaways

  • The private sector’s capital spending will sustain economic growth, and economic stimulus is expected to mitigate the impact of an anticipated jump in the consumption tax.
  • A recently revised Corporate Governance  Code has helped Prime Minister Abe live up to his promise of corporate governance reform.
  • Japan’s total factor productivity growth between 2012 and 2016 was the highest among the G7 countries.

Although global political and macro headlines weighed on its stock markets in 2018, Japan’s economic and market fundamentals remain on the right track toward normalization: Nominal gross domestic product (GDP) growth was broadly sustained; core consumer product inflation (which excludes fresh food) remained around 1% as of the end of October¹; and – most importantly for equity investors – corporate governance reform has made steady progress. Looking forward to 2019, although we are aware of the increased macro and market uncertainties externally, Japan’s sustained recovery may not be derailed given several ongoing structural changes.


Abenomics has sustained economic growth
Last September, Prime Minister Shinzo Abe won the Liberal Democratic Party (LDP) presidential election as widely expected. Now he is set to become Japan’s longest-serving prime minister in history, ensuring that his economic policy mandates continue to progress. Domestically, the biggest macro risk in 2019 may be a scheduled October increase in the consumption tax to 10% from 8%, which is designed to restore the nation’s financial credibility. Although the previous tax hike to 8% from 5% in 2014 undermined household consumption and private capex, the 2019 rise isn’t expected to derail Japan’s economic growth this time around because the Abe administration plans to launch stimulus packages to cushion the impact. The Bank of Japan also continues to demonstrate its commitment to current easing policies, taking into account uncertainties such as the effects of the coming consumption tax hike. Although some investors worry about deceleration of asset purchases by the central bank, we think it allows the bank to extend the life of monetary easing measures. Such political stability and promises of a stimulus support healthy structural growth in Japan’s economy and corporate earnings, bolstering a much-needed recovery in capital expenditures. Cash-rich Japanese companies plan to step up capital spending to upgrade facilities that have been underinvested over the last two decades and to accelerate automation in order to cope with labor shortages. The labor shortage also has spurred a rise in wages, which often lifts consumer sentiment. Capital expenditures and household spending have been the drivers of the recent GDP growth, finally forming a long-awaited virtuous circle in Japan.

1 Ministry of Internal Affairs and Communications as of October 2018. http://www.stat.go.jp/english/data/cpi/1581-z.html


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