The Japanese equity market steadily underperformed other developed markets throughout the second quarter. The total return for the three months was -2.5%, primarily as a result of weakness in May. The Japanese currency strengthened against other major currencies, driven partly by its perceived safe-haven status at times of geopolitical risk, and partly as a result of changing interest rate expectations in the latter part of the quarter. The strength was particularly pronounced against sterling, which resulted in a positive total return from the market of 2.4% for a sterling-based investor.
Although not in itself an economic event, the abdication of the Japanese Emperor and the start of the new Reiwa era did lead to a rather subdued market environment in late April, ahead of the extended Golden Week public holidays. However, the principal development during the quarter was the continued escalation of trade issues. Hopes for an early resolution to the US-China dispute were dashed at the beginning of May by the sudden announcement of sharp increases in US tariffs on imports from China. These higher levels would inevitably have a much greater volume impact, with repercussions throughout global supply chains. In addition, the US campaign against Huawei, in particular, is already having a marked impact on Japanese electronic component suppliers. For most of the quarter, these negative factors exacerbated the reaction to a cyclical slowdown in earnings growth, which was evident in the corporate results for the final quarter of the fiscal year.
Meanwhile, the direct bilateral trade talks between the US and Japan took a backseat and any substantive announcements seem to have been delayed until August, safely after Japan’s Upper House elections in July. However, at the end of the second quarter, an otherwise uneventful lead up to the G20 meeting in Osaka was interrupted by an unexpected outburst from the US president on the perceived iniquity of the security arrangements between the US and Japan. Nevertheless, the summit meeting itself seems to have passed off without any major incidents and the prospect of renewed US trade talks with China helped to improve sentiment into early July.
Economic data released over the three months was truly mixed, with the largest positive surprise seen in Japan’s growth rate for the first quarter of calendar year 2019. This showed real GDP grew at an annualised rate of 2.1% during the quarter whereas consensus expectations had called for a decline. Although the detailed breakdown behind the headline number was not particularly encouraging for the domestic economy, it does mean that Japan is likely to avoid a technical recession in the short term.
While the US Federal Reserve edged towards interest rate cuts, the Bank of Japan left its own monetary policy, and the associated language, unchanged in the quarter. Although there was nothing in domestic Japanese data which would currently argue for any change, the likelihood of US rate cuts has altered the prospective interest rate differentials between Japan and the US. With Japanese short-term rates already negative and long-term rates very low and declining, the central bank has very little room for additional easing through traditional policy measures. In any event, inflation pressures do seem to be slowly responding to existing policies despite a short-term hiatus in June.
Following the results recently announced for the fiscal year, which ended in March, most listed companied held their annual general meetings for shareholders in June. Historically these have been tedious affairs, with little to hold the interest of investors. However, the growing focus on corporate governance, combined with greater shareholder activism, has begun to produce some fascinating results. This year, the greatest reversal of fortunes for incumbent managements occurred at Lixil and Nomura Holdings. Both of these situations have been widely covered by the international media and also provide much encouragement for investors who are involved in less-conspicuous day-to-day engagement with Japanese companies.
|Q2/2018 - Q2/2019||Q2/2017 - Q2/2018||Q2/2016 - Q2/2017||Q2/2015 - Q2/2016||Q2/2014 - Q2/2015|
|Net Asset Value||-6.9||10.3||32.1||-1.6||25.9|
|Tokyo Stock Exchange 1st Section Index (TOPIX) (TR)||-2.1||9.5||24.2||9.5||18.4|
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