Although Japan’s stock market has substantially underperformed its counterparts in the US, UK and euro-zone during the past few months, economists at Capital Economics don’t expect it to remain a laggard.
A brighter future for Japan’s stock market
“While the combined weight of the IT and communications is bigger in the MSCI Japan Index than in the MSCI EMU and MSCI UK indices, it is considerably smaller than in the MSCI USA Index. The upshot is that the rotation trade ought to have been broadly positive for the MSCI Japan Index, at least vis-à-vis the MSCI USA Index.”
“While there may be myriad sector-specific explanations, an overarching one is the situation on the ground in Japan itself: the economy has fared worse than we had anticipated; COVID-19 cases had picked up sharply again until recently; and the vaccine rollout has been slow. Nonetheless, we still think things will turn a corner. And we are sticking to our view that the rotation trade has further to run in general, even though we expect it to become more nuanced.”
“The upshot is that we doubt the MSCI Japan Index will keep underperforming its counterparts. Indeed, in US dollars we project a cumulative price gain of ~17% from the index between now and the end of 2022, which is more than the price gains we forecast from the MSCI USA, UK and EMU indices in this period.”