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Japanese equities: A stock picker's market
Dickon Corrado
Portfolio Manager

Japan’s economy has seen better days. Still reeling from the effects of a consumption tax hike and global trade tensions, Japan is also contending with the unwelcome addition of the coronavirus outbreak. The latter has caused huge disruptions to tourism and supply chains as well as forcing the highly anticipated 2020 Olympic Games in Tokyo to be postponed.


Amidst this wave of uncertainty, newly named portfolio managers of the Capital Group Japan Equity strategy (CGJPE), Akira Shiraishi and Dickon Corrado, share their outlook for Japan and insights on how to unlock investment opportunities in one of the world’s largest equity markets.1


 


There are growing concerns that the coronavirus outbreak could push Japan into an economic recession. What are your thoughts about the outlook for the Japanese economy?


Akira: Several factors have combined to paint a negative outlook for Japan in the short to medium term. As an export-oriented country, Japan’s economy was already under sustained pressure in 2019 due to trade tensions and the coronavirus outbreak (mostly in Asia) towards the end of the year.


The waning demand is reflected in the numbers. Japan’s total value of exports declined 4.6% year-on-year in 2019, with exports to Asia, its largest export destination, experiencing a 7.6% year-on-year drop.2 


This year, the spread of the epidemic globally has magnified the situation, with exports falling for the 15th consecutive month in February.3 But falling exports are only one part of the story because the coronavirus outbreak has also triggered travel restrictions worldwide. Tourism, which plays an increasingly important part of the domestic economy, has been heavily impacted with the number of international visitors to Japan falling for the fourth consecutive month in January.4 Considering all these developments, it is fair to say that the economic outlook for Japan is not great.


Dickon: The coronavirus is among several headwinds Japan is facing today. Structurally, it is also impeded by a shrinking and ageing population5, and the Bank of Japan has been struggling for many years to generate inflation. I feel the consumption tax hike in October 2019 is probably misguided as they should be lowering taxes for consumers to achieve higher inflation. Also, if they are really worried about the fiscal imbalance, efforts should have gone into cutting government spending, which I feel is the least efficient part of the economy. 


Another worry is the postponement of the summer Olympics in Tokyo, not only because of the amount of time, effort and resources that have gone into it, but the negative sentiment it could create. Having said that, there are positives in the Japanese economy such as its high domestic savings (24.7% of GDP in 20186). It is generally seen as a safe-haven market because Japan is keeping a huge amount of money within its borders. Consequently, the Japanese yen has been fairly stable during the recent volatility7, whereas many other countries are experiencing the double whammy of a weakening currency and a falling stock market, especially in US dollar terms. 


1. Akira Shiraishi and Dickon Corrado were added to the CGJPE portfolio management team with effect on 1 April 2020.


2. 2019 Trade Statistics, Value of Export and Imports. Source: Ministry of Finance, Japan


3. February 2020 Trade Statistics, Value of Exports and Imports. Source: Ministry of Finance, Japan


4. Estimated number of international travellers to Japan in January 2020. Source: JTB Tourism Research & Consulting


5. Source: National Institute of Population and Social Security Research, Population Projections for Japan: 2016 to 2065, data accessed on 12 August 2019


6. GDP: gross domestic product. Source: The World Bank


7. Data as at 26 March 2020. Based on the Japanese yen’s value against the US dollar. Source: Bloomberg


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Dickon C. Corrado is an equity portfolio manager at Capital Group. As an equity investment analyst, he covers industrials in Greater China. He has 20 years of investment experience and has been with Capital Group for 17 years. Earlier in his career at Capital, he covered Japanese machinery, steel and trading companies; Chinese and Taiwanese construction and engineering, electrical equipment and machinery companies; Asian steel companies; and small- and mid-cap companies in China as a generalist. Prior to joining Capital, Dickon was at Merrill Lynch Japan. He holds an MBA from the Kenan-Flagler Business School at the University of North Carolina, a master’s degree in international economics from Fudan University in Shanghai, and a bachelor’s degree in economics and engineering science from Vanderbilt University. Dickon is based in Singapore.


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