We remain bullish on Japan despite recent US political turmoil

Despite negative jolts, underlying Japan market sentiment remains positive
It certainly was an eventful week for us in Japan, starting with news of the old national carrier, NTT (9432) making its wireless subsidiary, Docomo (9437) a fully owned unit, sending a strong signal that the group’s wireless charges will be lowered as requested by Japan’s new PM Suga-san. The first of the US presidential debates got off to a bad start, characterised by many disruptions and much heckling, with neither candidate looking to have managed to sway the undecided voters their way. Japan’s Stock Exchange’s unprecedented system failure on Thursday which kept the market closed for a whole day left sentiment slightly jaded although most came away impressed with the candid explanation provided by its senior executives. 

Friday’s market got another negative jolt by the news that the US president and the first lady have both contracted coronavirus, throwing the planned election campaigns and the remaining debates into disarray with only a month left before the election day. Although the news also dragged US stocks lower, hopes this change in dynamics will improve the chances for an agreement over a fiscal stimulus helped shares recover from their lows. Although the S&P finished the weekly higher, posting its first weekly gain in 5 weeks, Topix could not hold on to its early gains as end of the quarter selling followed by the disruption from the market’s system failure and then news of the virus spreading to the White House left the index nearly 1.5% lower and back down to near its 50 day moving average. 

Despite last week’s volatility, market sentiment seems to have remained fairly positive in Japan. This is certainly reflected on performance of smaller cap indices with TSE Mothers index continuing with its uptrend, having risen by over 120% from its March lows. China’s economic recovery looks to be continuing, also raising hopes for improving Japan exports to the region. Japan department store sales are also showing notable signs of second derivative improvements as sales of high-ticket items have started recover. US auto sales have also shown first signs of YoY improvements for September and with Chinese auto sales having been on a solid recovery demand for a few months now, hopes are rising for Japanese auto sales, not to mention, related parts and components which have been weak, even before the pandemic. 

Broadening interest in cyclical stocks another positive for Japan 
To be sure, we have been expecting much political turmoil in the run-up to the US presidential election having explored many possibilities in the past few months with a potential skirmish in South China Sea as being one of the more obvious distractions. We think with President Trump reportedly contracting the virus, this unexpected development could actually alter the course or severity of China-bashing by US policy makers for the next few weeks, potentially delaying any decision of putting a blanket ban on sales to Chinese chip makers and China refraining from issuing its “unreliable entities” list which as we explained again last week could provide more reasons to sell tech stocks. 

This week we will spare readers from our near-term negative views on the technology sector which we have adopted since early August. However, with gradual improvement in performance of shares of more cyclical businesses which have been badly hit by the pandemic, we continue to believe that Japan stocks remains well positioned to outperform most other developed markets thanks to their generally more attractive valuations, stronger corporate balance sheets and Japanese market’s highly cyclical nature. Although we also continue to think that the Japanese currency is on a gradual strengthening trend against the Greenback which will provide some headwind to our bullish outlook, we believe the recovery in end-demand is a far more positive earnings development at this stage for than forex moves potentially dampening exporters’ bottom-line. 

With Suga’s new government proposing another supplementary stimulus budget, not to mention, a big national budget for next fiscal year which promises to be over ¥100 trillion and one that has digitalisation of government services central to its spending policy, we are very much encouraged to see that policy makers are moving away from gold-plating motor ways and building bridges to nowhere and focusing more on improving productivity of the Japanese government itself. With plans to improve digital infrastructure in rural areas and tackling the consolidation of regional banks by offering public funds to help clean up any problems loans to encourage mergers, Suga’s government seems to be heading in the right direction in terms of helping decentralisation of businesses away from Tokyo while also providing some domestic economic recovery hopes.