Temple said that Japan is in the early stages of inflation normalisation which should lead to changes in consumer purchasing behaviour and household asset allocation decisions. “Companies are managing their balance sheets more effectively, which should lead to higher returns and increased growth as capital is put to more productive uses,” he said in a note this week.

He expects wage gains to persist in 2025 with real wages turning positive. “Higher wages should increase pressure on companies to invest to raise productivity, accelerating economic growth,” Temple continued.

Wage gains are important as they drive domestic price increases. Core inflation, defined in Japan as all prices including energy but excluding fresh food, has exceeded 2 per cent year-on-year for the last two years, exceeding wage growth through much of that time. Given relatively severe labour shortages in Japan, Temple expects ongoing upward pressure on wages should translate into sustained domestically-driven inflation.

He also thinks that the Bank of Japan is likely to raise rates minimally by year-end, risking an even weaker yen, to avoid snatching defeat from the jaws of victory in the fight against deflation and lowflation.

Asset allocation
Temple highlighted how in mid-2022 Japanese households had 55.2 per cent of their financial assets allocated to bank deposits and currency but only 9.9 per cent to equities. To the extent that he sees a sustained reallocation away from negative real yielding assets such as deposits and currency into riskier assets, he thinks there could be additional upside in equities.

The Japanese government also overhauled the guidelines for Nippon Individual Savings Accounts (NISAs) in January 2024 to triple the amount that can be invested and significantly extended the tax deferral period for the accounts. Inflows into NISAs have since increased by approximately 300 per cent. Historically, about 80 per cent of inflows into NISAs were allocated to non-Japanese assets but, so far in 2024, the overseas allocation has fallen to 50 per cent, perhaps signalling the resurgence of a culture in which investors would rather take on risk than deposit funds into bank accounts with 0 per cent interest rates.

Temple believes that the best approach is to allocate capital away from cash to riskier assets while identifying those risky assets that are less correlated to the most expensive parts of the global equity market, such as tech and artificial intelligence leaders. Instead, they should invest in areas of the market that have more unrecognised upside going forward. These include emerging markets, Japan, small cap, and infrastructure-related equities.

Other wealth managers
Other wealth managers, such as BNY Wealth Management, also believe that the story is far from over. Kelly Chia, deputy head of research Asia at Swiss private bank Julius Baer, thinks that Japan is a market which will still be able to compete with Standard & Poor’s 500 Index (S&P500) in 2024. “Corporate reforms, currency and flows have continued to be encouraging,” Chia said in a note. He thinks that large market cap, pay hikes, earnings revisions and geopolitics are factors that add to the positive outlook for Japanese stocks.

Despite the market's rise, Redmond Wong, chief China strategist for Saxo Markets, also believes that numerous undervalued investment opportunities remain, particularly among companies trading below book value and deep-value net-net stocks. “These factors make the Japanese market attractive for value-oriented investors who may wish to conduct further research on potential investment opportunities,” he added. See more commentary here and here.