All eyes on Japan — Market Insights (February 2024)

Will prices in Japan surge to drive policy changes?

Japan is among the few markets where inflation hasn’t been a headache for households and central bankers. But instead, policymakers in Japan welcome inflation. This month, the country is concluding the spring wage negotiations, or Shunto that takes place every year. 

The country’s largest federation of trade unions says workers are poised to receive a weighted average of 5.28% in salary increments in fiscal year 2024, ushering an end to a decades-long deflationary economy.

These developments will encourage the Bank of Japan (BoJ) to start normalising its policy by first reversing the yield curve-control policy and negative interest rates. Japan’s Nikkei 225 index notched a robust gain of 8% in February and its brethren, the TOPIX 100 went up 6.2%.

What's historic and has further built the general buzz over the country's equities market was that after locking in gains of more than 28% in 2023, the Nikkei 225 also finally broke through the peak it previously reached 34 years ago — the same year Taylor Swift was born, in 1989 .

What has gotten the markets so excited about an oft-forgotten country when it comes to investment allocation? Let's take a deeper look:

The past, the present and the future: Japan equity markets

The Japanese equity market has experienced multiple phases over the past 20 years, characterised by periods of significant growth, stagnation, and recovery. If we had to break its journey into segments:

2004-2012: Recovery and challenges

After its asset price bubble burst in the early 1990s, Japan faced a prolonged period of economic stagnation known as the “Lost Decade.” Recovery attempts were made, but the 2008 financial crisis and the 2011 earthquake and tsunami posed severe challenges to regaining growth.

2012-2020: Abenomics and market growth

Late 2012, Prime Minister Shinzo Abe introduced "Abenomics” to revive the economy through monetary easing, fiscal stimulus, and structural reforms, which marked a turning point.

2020-2022: COVID-19 pandemic

The onset of the COVID-19 pandemic introduced volatility and uncertainty into global markets, including Japan. Sharp declines at the start of the pandemic were followed by modest recovery, supported by government stimulus measures and the BoJ’s continued monetary easing. 

2023-Year to Date: Recent developments

From tourism to export, Japan has been a major beneficiary of the post pandemic recovery era. A weak Japanese yen and accommodative monetary policy were a few of the fundamental drivers, with more favourable factors at play. 

In particular, corporate governance reforms in Japan, aimed at improving profitability and efficiency among Japanese companies, are making Japanese equities more attractive to both domestic and international investors.  

The government's focus on digital transformation and green energy as part of its growth strategy has invigorated investor interest in related sectors in the country.

Rising inflation has also prompted savers in Japan to seek higher returns in the stock market as traditional savings options become less attractive with the anticipated end of low interest rates.

In the past more than 10 years, the Japanese market had trailed its developed market peers by a significant margin. From 2010 to 2022, the TOPIX 100 Index (in Japanese Yen) underperformed the S&P 500 (in US dollar) by about 170% and the MSCI World (In local currencies) by about 42% in cumulative terms. However, by March of this year, the TOPIX 100 had caught up to the MSCI World and even outstripped it by 3%.

In the period from January 2023 to the start of March 2024 (14 months), the TOPIX 100’s cumulative return was 54.4%, beating the S&P 500 by 18.3% and the MSCI World by 22%.

As of 15 March 2024, the markets are speculating that the BoJ will raise interest rates after Japan’s largest union group announced stronger-than-expected wage increases. On the back of this announcement, several asset managers have come out with favourable outlooks for both Japanese equities and the yen.

Over the past 20 years, the Japanese equity market has navigated through periods of challenge and growth, significantly influenced by domestic policies and global economic trends. As always, it's important for investors to remain aware of the potential for volatility and shifts in market dynamics, emphasising the importance of a diversified and informed investment strategy. 

For investors considering Japan as part of their portfolio, Endowus Fund Smart carries two Japanese equity funds (as of 18 March 2024) offered by Goldman Sachs Asset Management and First Sentier Investors.

Read more: Investing beyond China: India, Japan, Southeast Asia and more

‍Elsewhere, inflation needs to fall further 

Over to the other side of the world, broad-market indexes are also hitting all-time highs. 

In the US, inflation remains the primary concern before the Federal Reserve can confirm its victory in curbing escalating costs. Most recently, the US market appeared to be somewhat complacent following a speech by Jerome Powell, the Chair of the US Federal Reserve, with the S&P 500 index hovering at a historical peak.

Powell had confirmed that the Fed was "not far" from gaining the confidence it needed, in the falling inflation figures, to begin cutting interest rates. Still, a March interest rate cut is unlikely, with 90% of fund managers we surveyed responding that the first rate cut may come later in the year, as inflation is still above the Fed’s long-term inflation target of 2%. 

Despite the recent peak in interest rates, the high cost of borrowing has not deterred the continued run in the S&P 500 index, with Magnificent 7 stocks leading the benchmark to new heights. In February, the index advanced by another 5%. With the primaries underway, the US is steps closer to determining its next leader. With ​​Joe Biden and Donald Trump clinching nominations from their respective parties, the stage seems set for a repeat of the 2020 election showdown.

February market commentary

After a slow January, the markets roared back to life in February. China enjoyed a significant rebound with the CSI 300 returning more than 9% (in CNY). Japan was a distant second with TOPIX 100 coming in at 6.2% (in JPY). The S&P 500 returned a respectable 5.3%. India’s return in February was disappointing with the Nifty 50 at 1.3%, underperforming the rest of the major Asian markets.

February data in the US continued to paint a picture of economic resilience. CPI dropped from 3.4% in January to 3.1% in January but ticked up again to 3.2% in February.

In terms of factors, small caps generally underperformed large caps across the board. Although in the US, the small cap stocks did hold up well against large caps. The difference in performance was negligible. Growth was, once again, the flavour of the month as growth stocks outpaced value stocks in the US, developed markets and emerging markets.

Turning to fixed income, we saw yields increase as investors anticipated that central bank rate cuts may come later rather than sooner.  Credit did well - high yield bonds outperformed investment grade bonds. EM debt (hard currency) also did well.

In February, the S&P GSCI Index experienced a slight uptick, driven by increases in livestock and energy prices which balanced out declines in agriculture, industrial metals, and precious metals sectors. Within the energy category, crude oil and Brent crude rose while natural gas experienced a significant decline. Agriculture was the index's weakest segment during the month.

Building a long-term resilient portfolio with Endowus Hong Kong

It is almost impossible to predict exactly how macro events would play out. However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.

With digital wealth platform Endowus, you can plan and manage your money — by investing in Best-In-Class Funds and globally diversified, low-cost model portfolios seamlessly.

Click here to get started on your investing journey with Endowus Hong Kong today.

Read more:

• Introducing Endowus model portfolios — curated with Best-In-Class Funds for core-satellite strategies
• Why invest through Endowus
• NEW: Introducing Endowus IncomeUp Portfolios
• No January jump for 2024 — Market Insights (January 2024) | Endowus HK

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