There are growing expectations from investment managers and economists that a probable change of monetary regime following the forthcoming 16 December elections in Japan will signal an end to Japan’s long-drawn-out deflationary era.

A commentary from Masashi Oda, chief investment officer, SuMi TRUST, predicts a big change of course in the country if the Liberal Democrat Party wins power and follows up on its promise of aggressive monetary easing and fiscal expansion.

“The LDP aims to achieve the goal by setting an inflation target of 2 per cent and easing monetary conditions further. The regime change is expected to end the age of long-lasting deflation and yen’s appreciation which Japanese companies suffered for years,” he said.

Against that background, Oda argues that markets such as Japan’s equity indices offer relatively attractive values. “The Japanese market still offers investors attractive value with the estimated PER gap between TOPIX and S&P 500 still in negative territory and the expected PER of TOPIX still around the bottom of its 2010 to 2012 range. Additionally, share prices for many companies do not reflect the sound fundamentals that they enjoy and therefore we see a number of attractive investment opportunities in the Japanese equity market,” he said.

Other investment houses, such as UK’s Psigma, have recently argued that the possibility that the Bank of Japan would be charged with aggressive quantitative easing will boost the country’s stock market and devalue the yen, aiding exporters. One concern for investors has been that Japan has been through several “false dawns” before, only to see hopes of economic revival dashed.

Raising expectations

The firm has, SuMi TRUST’s Oda said, increased its overall forecast for earnings growth, having cut estimates as recently as October.

“Despite seeing a single digit earnings growth for FY2012, for FY2013 we have upgraded our general forecast by around 1 per cent and anticipate double digit growth,” he said.

Oda said his firm has chosen companies he expects to weather storms including any worsening of already-tense Japan-China relations, an issue that has weighed on sentiment in recent weeks.

“Such stocks include Calbee, Japan’s leading manufacturer of snacks with about 50 per cent share of the market and Ryohin Keikaku, who plan, produce and retail a wide range of self-branded goods from foods to apparel to household goods under the brand name MUJI," he said.