Investment Clock insights

Japan's stock market has further to run

Trevor Greetham, Head of Multi Asset

11 October 2017

Japan's stock market has hit a two decade high but we think it has further to run. The economy is picking up, corporate profits are being upgraded and the central bank is on the side of equity holders - unusually they have pledged to overshoot their inflation target of 2% and are keeping policy very loose until they get there.

This policy commitment makes Japan's stock market a useful hedge against possible losses on bond portfolios if US interest rates continue to rise as we expect. Japanese long-term rates are pinned down close to zero. Whenever US bonds sell off, widening interest rate differentials weaken the yen and boost the export-oriented Nikkei (see chart).

It is for this reason that I have been overweight Japanese equities in our multi asset funds but underweight the yen since this element of Abenomics was first announced. We don't expect the snap election to change things for the worse. If anything, an opposition win could result in the abandonment of planned sales tax rises, resulting in even looser fiscal policy.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.