Ahead of the release of Japan’s preliminary GDP figures for the first quarter of 2023 this week, Hiroyuki Ueno, chief strategist at SuMi TRUST, paints a mixed picture for growth and looks at the outlook for the stock market in 2023.  

One of the large Japanese investment houses reckons the country's gross domestic product will rise slightly in the first three months of this year as inbound tourisim, and consumer spending, pick up. 

That's the view of Hiroyuki Ueno, chief strategist at SuMi TRUST. In the first quarter of this year, Japanese GDP growth will rise by around 0.1 per cent on the previous quarter and go up by 0.4 per cent on a year before.

“The slowdown in overseas economies is dragging on growth while private consumption is recovering as domestic economic activities normalise post-Covid. Service-related sectors, such as accommodation and restaurants are expected to have contributed significantly to GDP growth in Q1 2023,” he said. “Recovering domestic consumption post-Covid is stifled by global headwinds, but Japan is well positioned to achieve a virtuous cycle of wage growth in the years to come."

“Although the yen strengthened temporarily in the first quarter, it has returned to the 130/$ level. As the policy rate differential between Japan and the US is expected to remain high, we expect the yen to remain weak in the long term,” he said. 

However, he believes that 130/$ exchange rate favours the export and manufacturing industries. Some import industries, such as energy and service industries, benefited from the temporary recovery of the yen in January. “Long term, a weak yen is good for Japan’s economic prospects,” Ueno continued. “The negative impact on Japan’s GDP of the slowdown in US and European economic growth is likely to be prolonged, although the recovery in China will support GDP growth to some extent,” he said.

“Q1 GDP growth will also be supported by the recovery in Japanese consumer spending that has followed the country’s post-Covid reopening. The return of inbound tourism will also be a factor," he continued. While China's zero-Covid policy change should boost the recovery of Japan’s exports, he believes that consumption by Chinese tourists will not affect Q1 GDP as they are only beginning to travel to Japan again.

For decades after the late-1980s property crash, Japanese equities languished relative to other major countries', and predictions of a sharp improvement were treated as potential false dawns. However, in recent years, the result of corporate supply-side reforms and fiscal and monetary policy changes have encouraged investors to start smiling on Japan again. (See this commentary, for example, by Pictet Asset Management. The Swiss firm noted that overseas investors have in aggregate underweighted Japan for much of the past two decades. Currently, foreign equity portfolios’ allocation to Japan is at its lowest level since 2012.)

Confidence
Ueno expects the outlook for business confidence in the non-manufacturing sector to remain positive, as the domestic economy starts to recover in earnest, despite rising prices. “Government stimulus measures, including the national travel assistance program, are also supporting the recovery,” he said.

“As we approach H2 2023, inflationary pressures are expected to ease, whilst domestic demand should remain strong as wages continue to rise. Wage increases, which are above the rate of inflation, will stimulate economic growth,” he continued.

He believes that the Japanese economy is likely to remain largely unaffected by the liquidity problems of the financial institutions in the US. Japanese financial institutions are well capitalised and have a stable funding base. The Japanese financial system is being monitored to withstand liquidity risk.

“In 2023, the Japanese stock market is expected to remain robust, with the Nikkei Stock Average exceeding 30,000 yen towards the end of the year. The undervaluation of Japanese equities may also attract attention from investors,” Ueno said.

Sumitomo Mitsui Trust Asset Management (SuMi TRUST) is a large asset manager in Japan with $640 billion assets under management. With a strong local presence in Japan, SuMi TRUST provides institutions and multi managers in the UK, Europe, the Middle-East and Asia with the opportunity to invest in a broad spectrum of Japanese equity and fixed income investment strategies. See here for other articles about the asset manager.