Japan’s Olympics looking likely to be a big flop
Japan’s stock market continues to trade within its narrow band for now with Topix testing its 1900 support line last Friday before staging an intraday recovery from those lows. Meanwhile, global markets’ schizophrenic rotations from one segment to next continues as economic outlook has rapidly evolved from expectations for a strong post-pandemic recovery, to concerns about a high inflationary period, then to a sudden formation in consensus that higher prices will prove only transitory, and finally to most recent worries about growth actually slowing, all in matter of three months.
The latter scenario is one that impacts our market the most as Japanese stocks are generally highly economic sensitive and a sell-off in global cyclical names tend to weigh on sentiment. However, the key concern specific to Japan remains the resurgence in Covid infections led by the delta variant. Policy makers have remained unflinching in staging the Olympics later this month, ignoring people’s broad opposition to holding the games, and in the face of dire warnings by medical experts about the potential for a super-spreader event, especially given the low level of vaccination rate that leaves Japan ill-prepared for such a grand spectacle.
The government’s final decision last week by relenting to medical experts in extending the state of emergency during the games and not allowing spectators into its Olympics stadiums leave the summer games looking like a hollow victory rather than a symbol of human resilience at a time of adversary that many politicians had hoped the event will represent. Not only Japanese Olympics sponsors have voiced their reluctance to advertise their brands but now they are facing the growing possibility of anaemic TV viewing which we think leave advertising firms like Dentsu highly exposed to the event’s potential flop.
But there is a silver lining that keeps us bullish on our market
One great outcome that has been derived from the decision to stage the Olympics is that it has forced the government into action in raising the level of daily Covid vaccinations rates to over a million a day. Although less than 30% of the nation has received at least one dose, hardly enough to provide herd immunity against a potential super-spreader event, it has nevertheless put Japan on the right track.
To be sure, poorly organised inoculation programs of late have led to bottlenecks and shortages of jabs in Japan’s biggest municipalities despite the country having received over 100mn doses. We believe this latest hiccup was partly responsible in the decision to extend the state of emergency to period covering the Olympics and banning spectators in stadiums. Interestingly, this has boosted shares of reopening plays like railways and leisure stocks as investors seem to be looking beyond the summer games and anticipating a continued rapid improvement in vaccination rates going forward.
Moving on, with earnings season just around the corner, we expect corporate earnings trend to remain highly favourable, especially as the yen remains relatively weak against the currencies of Japan’s major trading partners. Although high double-digit earnings growth over the long run is clearly not sustainable among the highly operationally geared cyclical and value names that we currently favour, for the next few quarters we expect an impressive rebound in Japan’s corporate earnings and continued buybacks and share retirement programs which should prove very supportive. Given the highly attractive valuation levels, we see Topix renewing its March high of Y2K by end of this quarter and move above those thirty-year highs in Q4.