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Investment insights from Capital Group

Uniquely Japan: Navigating Asia's largest advanced economy
Kohei Higashi
Portfolio Manager
Harry Gunji
Portfolio Manager

Economic intricacies and structural challenges are commonplace in Japan. But looking through the lens of individual companies shines a different light on the nation.

In this paper, newly named portfolio managers of Capital Group Japan Equity strategy, Kohei Higashi and Harry Gunji, discuss how they are navigating turbulent times and outline where they see opportunities in Asia’s largest economy.

Macro uncertainties, the US Federal Reserve’s (Fed) tightening and a weak yen have caused jitters in Japan’s financial markets. What’s your outlook for the Japanese economy in view of these concerns?

Kohei: The interest rate gap between the US and Japan is a major cause of yen weakness. I believe the Fed will continue on its path of interest rate hikes to fight inflation. But playing the role of a proactive inflation firefighter has its downside as over-tightening can hurt consumers in the US, especially those from middle- and low-income households.

The Bank of Japan (BOJ) recognises this and has ruled out using aggressive rate hikes, while committing to keep the yen weakness in check. As the BOJ is unlikely to veer away from its current monetary policy stance, at least in the near term, the yen could remain under pressure. For some domestic-oriented companies, a weak yen is a risk. But for exporters, it is a tailwind.

The yen’s weakness also has an inflationary impact on Japan’s economy given the country’s position as a big net importer of energy, food and soft commodities. Inflation has been hovering above the central bank’s 2% target for a few months now. It is not unprecedented for it to rise to higher levels, as experienced in the 1970s.

The reopening of borders and businesses, pent-up consumer demand, and savings accumulated during the pandemic, are all providing support for Japan’s economy and other parts of the world. It remains to be seen whether the current consumption level can be sustained globally. I expect it to last through the rest of the year before tapering off in 2023.

The BOJ is out of step with other major central banks

Having a plan for interest rates and the credibility to impose it on markets is of paramount importance to the central bank

Implied change in policy rate in one year (%)

As at 30 June 2022. US: federal funds target rate midpoint of range; Eurozone: European Central Bank deposit facility; Japan: Mutan overnight average call rate; UK: Bank of England official bank rate. Sources: Capital Group, Bloomberg

Harry: We’re at a potential turning point in macro cycles and geopolitical dynamics. Not just Japan, but the world is facing a long list of uncertainties, with the main ones stemming from geopolitical tensions, supply chain disruptions, rising interest and inflation rates, and the ongoing pandemic.

Much attention is given to the US and how the workings of its economy will affect the world. But it is important to acknowledge the differences between the US and Japan as these economies are structurally different and face different issues.

In the US, although inflation is at a multi-decade high, its labour costs are also rising as wage growth continues to be boosted by a tight jobs market. The US dollar has also been strong following this year’s aggressive rate hikes.

Kohei Higashi is an equity portfolio manager at Capital Group. As an equity investment analyst, he has research responsibility for electrical equipment, industrial conglomerates, machinery, consumer products, retail and textiles & apparel in Japan. He has 26 years of investment experience and has been with Capital Group for 18 years. Earlier in his career at Capital, he covered Japanese photographic products and office electronics, as well as Asian and European automobile manufacturers. Prior to joining Capital, he was a senior crude oil trader at Mitsubishi Corp. He holds an MBA from Harvard Business School and a bachelor’s degree from the University of Tsukuba in Japan. Kohei is based in Los Angeles.

Harry Gunji is a partner at Capital Group and serves as a board director for Capital International KK. He is a portfolio manager and an equity investment analyst at Capital International Investors (CII) with research responsibility for global chemicals (excluding the US) and several industries in Japan. He also works as a member of the Proxy Voting Guideline Committee for Capital Group, an ESG chemical sector lead for the Investment Group, and an ESG Champion in CII. He has 23 years of industry experience and has been with Capital Group for six years. Prior to joining Capital, Harry was a senior equity analyst at Fidelity in Tokyo and a global equities analyst at investment managers in New York and Hong Kong. Prior to that, Harry was an investment banker in New York and Tokyo at Morgan Stanley, UBS, and Lehman Brothers. He holds a bachelor’s degree in political science from Waseda University. Harry is based in Tokyo.

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