Market Outlook 2008 -  Japan -  Chris Burling


The Japanese economy should continue to expand as it increases its focus on Asia, its relationship with China in particular, and in doing so diminishes its reliance on the US. This trend is likely to accelerate in 2008 as increased infrastructure investment continues to power economic expansion in emerging markets.

Despite the increased trade with its Asian counterparts, Japan still remains geared towards sentiment in the US.  Any signs of improvement over the Pacific are therefore likely to lead to a rally in the Japanese equity market.

Japan's credit rating has recently been upgraded by both Moodys and Standard & Poor's. Domestically the economic outlook is improving, albeit at a sluggish pace. Industrial production has been strong and there are inflationary indicators. Despite these signs of growth, the Bank of Japan has postponed further rate hikes, although we expect it to raise interest rates later in 2008.

One of the main attractions of Japanese stocks is their valuations as many are trading at historically low multiples despite offering strong growth. Japanese companies have delivered six consecutive years of rising earnings. The third quarter earnings season was no exception, with more than half the large companies listed on the first section of the Tokyo Stock Exchange beating sales and net profit expectations. Japanese companies tend to be conservatively managed, with low levels of debt so they are well placed to outperform amidst the fallout from the global credit crunch. Upward revisions to profits should provide a further catalyst for the Japanese equity market as the year progresses.

Sectors with strong potential include electronic & electrical stocks with demand for LCD televisions expected to be buoyant following cuts in LCD panel prices. This sector should also benefit from increased demand for televisions in the lead up to the Olympics while low unemployment and rising wages should provide a further boost to consumer activity.

Asset price inflation remains a core theme in the Japanese market with rents and land prices continuing to climb. Real estate stocks should therefore deliver healthy returns in 2008. Tighter regulations on emissions in the US should boost companies connected with fuel efficiency such as Ibiden which manufactures diesel particulate filters used to reduce emissions.

At a currency level, there is potential for the yen to strengthen against the pound, which would favour UK-based investors.


Past performance is not necessarily a guide to future performance. The opinions expressed here represent the views of the fund manager at the time of preparation and should not be interpreted as investment advice. The value of investments and any income from them may fall as well as rise and may also increase or decrease as a result of changes in exchange rates between currencies. Investors may not get back the amount originally invested.