Japanese equities could be set for a change in fortunes after the Liberal Democratic Party’s election in December.
The country’s stock market has rallied strongly since mid-November on expectations of the change in government, leading the Topix to end the year with an 18% gain — the first time Japan has outperformed global equities in seven years.
Investors are also optimistic about the appointment of a new central bank governor in April and a consumption tax hike in the autumn, as well as other positive trends.
“We think Japanese equities will break out of long years of undervaluation in 2013,” said Nomura in a bullish report yesterday. “Amid ongoing expectations of monetary easing, yen depreciation and an end to deflation, we think that investors will continue to see Japanese equities in a new light.”
Not everyone is so confident. The year-end rally has left some sceptics wondering if Japan has much upside left in 2013, but Nomura dismissed such fears, arguing that global funds are underweight Japanese equities.
“As the risks of not holding Japanese equities become increasingly apparent, we think that funds will start returning to neutral positions at the very least,” said the report, which predicted that a roughly 13% gain on the two main indices would push the Topix to 1,000 and the Nikkei Average to 12,000 by the end of 2013.
The bullish view on equities is supported by Nomura’s macro research team, which said in a separate piece that it expects a Chinese economic recovery to boost exports during the first quarter and push the Japanese economy into a stable growth phase in 2013.
The central bank will also play its part by setting an inflation target and taking further easing measures this month.
“The main risks are yen appreciation, a worsening European debt problem and the US and China slowing,” the bank said.
Much will also depend on Abe and his new cabinet. Key members of the new team include: former prime minister Taro Aso as finance and financial services minister (as well as deputy prime minister); former Liberal Democratic Party policy research council chair Toshimitsu Motegi as economy, trade and industry minister; and former trade minister Akira Amari as economic revitalisation and economic and fiscal policy minister, which Nomura described as “a key position in terms of the cabinet’s economic policy”.