Global Market Commentary

Why The World Is Buying Japanese Stocks

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Japan’s Prime Minister Cements Power and Drives Japanese Stocks Higher

On September 28, Japan’s main political opposition announced that it wouldn’t be fielding any candidates in the snap election that had been called by Prime Minister Abe.  The Japanese stock market had been having an unexceptional year, lagging other global indices but helped by a rise in the value of the yen.  It accelerated sharply after that announcement.

Source: Bloomberg

Abe’s popularity has recovered from allegations of insider dealing earlier in the year; his party maintained its two-thirds majority in the lower house of parliament, and his economic and financial policies were given a strong new mandate by the voters.  After this election, he’ll be free to continue with his “Abenomics” program to stimulate the Japanese economy.  He has also expressed his intent to initiate changes to Japan’s constitution to allow participation in military activities beyond the pure self-defense allowed by the constitution imposed on Japan after the Second World War.

Japanese stocks responded positively for several reasons.  For one, the Bank of Japan (BoJ) has an ongoing program to buy Japanese stocks through the medium of exchange-traded funds.  With Abenomics in place for the foreseeable future, the BoJ will likely be continuing its ultra-easy monetary policy, as well as its purchases of Japanese stocks via ETFs.

However, it isn’t just the BoJ that’s buying Japan now that the political overhang of Abe’s weakness is removed.  Japanese stocks are cheap on a number of commonly watched metrics.  With a current price-to-book ratio of 1.76, and a price-to-sales ratio of 0.98, the Nikkei compares favorably to many Asian economies (only South Korea is cheaper on these metrics).  On a forward price-to-earnings basis, Japan’s 14.6 compares favorably to the U.S.’ 18.3.

Given the backdrop of many global stock markets’ acceleration, institutional investors will be looking for places where they find more compelling values, and we believe that they will continue buying Japan.

Investment implications:  There are many ETFs available for investors who want exposure to Japan.  We recommend that investors who are buying Japan stick with stocks that are included in the main indices, such as the Nikkei and the Topix, and that they hedge the currency, as it could weaken while Japanese monetary stimulus continues and stimulus in other major world economies begins its slow normalization.  There are several liquid ETFs that trade in the United States and incorporate a currency hedge.