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With US stocks notching record highs this year, significantly outperforming their Japanese counterparts, the spread between the two equity markets’ valuations has widened meaningfully in recent months (Figure 1).

Why the performance dispersion? Japan’s relatively slower COVID vaccine rollout and the disappointing lack of economic support provided by the (previously) much-anticipated Summer Olympics have clearly weighed on market sentiment of late, but equity investors’ apathy toward Japan actually dates back several years. One might even say that it has become entrenched.

The good news? The valuation gaps between Japan equity and its global peers have arguably reached…

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Jun Oh
Equity Portfolio Manager
Hong Kong
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Japan has experienced deflation for much of the past 30 years (Figure 1). That’s the general consensus, so why my titular question? Because what Japan has not had over the past three decades is the sort of broad wage-service deflation that is most feared by economists. Instead, I would characterise Japan’s deflation as having been mostly idiosyncratic in nature.

Figure 1

Is Japan's deflation cycle at the end?

Deflation was mostly idiosyncratic

Japan’s protracted battle with deflation was largely attributable to specific dynamics, including the country’s botched policy response to its 1980s asset-price bubble, whose collapse in 1991 ushered in Japan’s so-called “lost decade” — a period of economic stagnation that lasted until 2001. In addition, I believe the massive…

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Paul Cavey
Paul Cavey
Macro Strategist
Hong Kong

In late May, Japanese Prime Minister Shinzō Abe’s cabinet approved a second 2020 supplementary budget of ¥31.9 trillion (US$298 billion) to further combat the bruising economic impact of the COVID-19 crisis. This latest fiscal package provides financing help to struggling companies, subsidies to help firms pay rent, funds for health care assistance and support for local economies.

The headline ”business size” of the package — including assumed private-sector activity, loans from public financial institutions and actual new spending by the government — amounts to ¥117 trillion (US$1.1 trillion), matching the size of Japan’s first package delivered in April. All told, the nation’s fiscal policy response to the crisis thus far totals ¥234 trillion, roughly equal to 40% of its GDP.

The approval of the second package follows a May 22 joint statement issued by Haruhiko Kuroda, governor of the Bank of Japan (BOJ), and Tarō Asō, minister of finance, which read:

“The Government and the Bank are committed to making every effort to facilitate corporate financing and maintain stability in financial markets through the…

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Paul Cavey
Paul Cavey
Macro Strategist
Hong Kong

Amid mounting global economic concerns, some investors have noted that Japan could be particularly vulnerable. The thinking is that a worsening global economy could put pressure on the yen to appreciate, which in turn could risk a cyclical downturn in Japan. Maybe so, but our view is that a full-blown Japanese recession is unlikely.

Although Japan faces challenges, we believe the country’s structural position is stronger than it has been in a generation. We also believe many investors are undervaluing Japan’s structural recovery story and other positive developments, creating potential opportunities for discerning investors.

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Katsuhiro Iwai
Katsuhiro Iwai
CFA, CMA
Equity Portfolio Manager
Tokyo
Paul Cavey
Paul Cavey
Macro Strategist
Hong Kong
Robert Wydenbach
Robert Wydenbach
Global Industry Analyst
London

The euro area shares many fundamental characteristics with the Japan of the 1990s: lower trend growth since the 2008 recession, a large and persistent current account surplus, low inflation, weak banks, corporates with a large and persistent financial surplus and an anemic demographic outlook. Although this theme isn’t new, markets are currently expressing this “Japanification” malaise in the euro area with depressed bank stocks, record low inflation expectations, tight spreads and low volatility.

We believe that uncertainty about the ability and willingness of European policymakers to deploy the necessary measures requires higher risk premia compared to Japan. The market continues to play the Japanification theme but it feels to us that the outcomes will be very different. While the adjustment trajectory of Japan has been long, stable and orderly, we believe there are three reasons why the euro area is unlikely to follow a similar path:

1. No safety net from global growth

Japan’s adjustment in the 1990s took place against the backdrop of strong global growth. In the five years after the Japanese recession in the early 1990s, global trade volumes increased significantly. Globalisation accelerated, allowing Japan to make a more orderly and smooth transition. We believe the euro area is unlikely to enjoy this tailwind as globalisation trends reverse and global trade flatlines…

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John Butler
John Butler
Macro Strategist
London
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