If inflation continues to ramp up in 2022, Japan could serve as a safe haven for global investors, fund managers have claimed.
Inflation has been one of the dominant concerns for managers and investors throughout 2021, having risen to decade-high levels and creating concerns about the outlook for interest rates, which are expected to increase further next year.
Japan’s 2022 outlook is not as dampened by rising inflation however. The Bank of Japan has forecast that inflation is likely to hit 1% by the middle of 2022, only half of its 2% target; a far cry from the UK’s current 5.1% and the US’ 6.8% levels.
FE fundinfo Alpha Manager, Richard Kaye from Comgest, said that, unlike the US, Japan “promises a rebound without the rising inflation that is spooking markets elsewhere”.
He said that 2022 “could be the year that inflation globally really takes off, and in our view Japan would prove a refuge.”
Following its latest meeting the Bank of Japan decided that it would not be fully reducing its monetary stimulus yet though.
The bank’s governor, Haruhiko Kuroda, said it was too early to consider normalising monetary policy at the risk that Japan would fall behind other central banks.
The bank has dialled back on some of its policies, voting to end the purchases of commercial and corporate bonds by March 2022, but has maintained its ultra-loose policy and extended financial relief for small companies still dealing with the impacts of Covid, maintaining a more dovish stance overall.
Kaye said that for global investors concerned about the gap between reported and real earnings if inflation does linger in markets “we believe Japan offers a safe haven”.
This positive outlook comes on the back of an underwhelming year for the Japanese equities compared to others. Year-to-date the Nikkei 225 has only beaten the MSCI China index, and lagged most developed-market indices, shown in the graph below.
Performance of indices YTD
Source: FE Analytics
The country has undergone a change in prime minister this year, with Yoshihide Suga handing over to Fumio Kishida after just over a year in office. At the time this caused a sell-off in Japanese equities as investors were concerned that Japan was slipping back into an era of political instability with short prime ministerial terms.
These fears have subsided though after Kishida won a comfortable majority in the snap election and is now focused on Japan’s post-Covid economy and supporting companies coming out of the pandemic; all positives heading into next year.
Kaye said that even though the captain has changed, the ship remains Shinzo Abe’s, with the economic plan still focused on growth, deregulation and corporate governance.
Kaye was not alone in his optimistic outlook for Japan, as Fidelity’s Nicholas Price said he was “broadly positive on the outlook for the Japanese market as we move into 2022,” although equities were still contending with supply chain issues.
Much like inflation, supply chain disruptions have been an ongoing concern across markets, with sporadic lockdowns impacting the consumer-related sectors.
As these bottlenecks loosen in 2022 this would make the pricing environment less favourable for companies, Price said, because they will not be able to capitalise on the shortages.
This means it is important to invest in companies that are not directly consumer-facing or manufacturers, the Fidelity manager added, preferring software and factory automation stocks.
Katsunori Ogawa, manager of Sakigake High Alpha Japan Thematic fund, was even more bullish on Japan’s prospects, noting that “2022 will be the year Japan finally clambers out of the Covid-19 trough”.
He said that companies in the IT and automation sectors were well positioned for next year, as the demand for technology will add to the semiconductor shortage, a theme Ogawa said will received a bigger push from the expansion of 5G next year.
Ogawa said even prior to Covid digitalisation, this was a key theme in Japan and something that needed to be developed further to help the economy cope with its demographic headwind of an ageing population.
Dan Carter and Mitesh Patel, managers at Jupiter Asset Management, said that demographics was the “mother theme” in Japan and agreed that a bigger adaptation to technology was needed to combat the consequences of a smaller working-age population.
Ogawa said that the private sector was leading the way in Japan regarding the adoption of digital solutions and procedures and he expected the public sector to follow suit in the coming years.
The thematic manager also pointed to the resumption of more normalised global travel as a big positive for 2022.
The Japanese economy missed out on the major tourism boost the Olympic games usually brings to a host country, as Covid cases were too high at the time in Japan warrant spectators. But 2022 is “expected to be the year international travel revives,” Ogawa said, provided Omicron does not develop into a bigger issue.
This would be a major positive for consumer facing industries, especially airlines and restaurants.
“Overall, a rosy picture for Japan as the sun rises over the 2022 horizon,” he said.