Japan’s Steady Performance To Continue

On the positive side, the economy has a robust industrial sector, accounting for some 30% of GDP, concentrated now in high-tech fields – machinery, electronics, manufacturing, automobiles, transportation, chemicals, and metals. Japan’s industries are imbedded in Asian supply chains, producing goods in the high end of the value chain. China and the US are Japan’s two largest export markets. Japan’s service sector, which accounts for 69% of GDP, has been the fastest-growing part of the economy over the past four decades. Leading service fields are finance, communications, information, and transport. Services sector activity has contracted amid ongoing pandemic restrictions; however, firms in the sector have indicated they have become increasingly confident that business conditions will recover in the coming months.

The Japanese stock markets have performed well over the past decade and have definitively outperformed over the past 12 months up to March 5th. The Nikkei 225 index gained 35.3% on a total-return basis, compared with 27.1% for the S&P 500 in the US and 15.5% for the EURO STOXX 50 in the Eurozone. If we look at the returns to US-based investors who are using ETFs to invest in the Japanese and European markets, the iShares MSCI Japan ETF, EWJ, gained 29.6% over the past year; and the iShares MSCI Eurozone ETF, EZU, gained 21.51%. The differences are due to both exchange rates (the yen weakened and the euro gained relative to the US dollar over the period) and to the MSCI indices tracked by the ETFs.

Last month at the peak of the stock market rally, the Nikkei 225 Index reached the 30,000-yen mark for the first time in 30 years, easing back to 28,864 by March 5. Attaining this landmark sparked concerns, as 30 years ago Japanese stocks were clearly in a bubble that eventually burst. The concerns are understandable. There clearly is some froth in global equity markets and considerable uncertainty driven by the pandemic. Financial markets are once again highly accommodative. However, there are important factors that reassure us about the prospects for Japanese equities. An important difference this time is that, with its inflation target of 2% likely to remain out of reach for the foreseeable future, the Bank of Japan is very unlikely to alter its very easy monetary policy in 2021 or 2022. As noted earlier, we expect a robust recovery in the economy beginning in the second quarter, gaining pace in the second half, and continuing in 2022.

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Disclosure: The author does not have any of the ETFs mentioned in this note in his personal investments.

Disclaimer: The preceding was provided by Cumberland Advisors, Home Office: One ...

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