"There have been so many false dawns for the Japanese equity market that it takes the skin of an elephant to recommend it to our clients. Yet a number of factors point to secular change," he said.
Performance of sector over 1-yr
Source: FE Analytics
Our data shows the MSCI Japan index rallying strongly since the start of the year, following its dramatic drop one year ago.
"Last year’s devastating tsunami will have a permanent impact on two fronts. First, the country will see a sizeable shift away from nuclear power to more expensive liquid natural gas-powered electricity."
"Secondly, the disruption to the global supply chain will lead companies – both domestic and international – to diversify their production facilities and suppliers, leading to another wave of offshoring. Taken together, that means we expect Japan to move to a structural trade deficit within a few years after more than three decades of surpluses," Farago added.
"Furthermore, the Bank of Japan announced an inflation target and followed up by initiating another round of bond purchases. What was unusual about this move was the fact that this occurred against an improving economic backdrop."
Farago says the Bank of Japan is under increasing political pressure to become part of the solution to the country’s economic woes and a change in governor next year will increase the odds on a further shift towards "easy money".
"We see profits rising rapidly over the next 12 months as the economy rebounds from the devastation of the tsunami. An easing of monetary policy that brings a weakening currency will provide an additional boost to a corporate sector that has proved adept at cutting costs after two decades of deflation," he explained.
A recent FE Trustnet story showed Japan funds were struggling to regain their losses following last year’s earthquake, tsunami and Fukushima nuclear disaster.