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Japan’s Bull Run Pauses for Breath

Right in line after Russia for the “Biggest Loser Award” is Japan – as its economy tanks this year. But Breakingviews’ Peter Thal Larsen proves to Reuters’ Tara Joseph that this bump in the road may be a precursor for gains in the future.

Fallen Stars…

Tara Joseph: “How the mighty have fallen, Peter. The Nikkei last year [was] one of the rising stars. Now it’s down 10% so far this year. And with Japan Display – the world’s largest maker of mobile phone screens – debuting down 15% on the stock exchange.”

Peter Thal Larsen: “Yes, I know it’s not a great start, is it? The Japanese stock market this year is actually worse than all major markets except for Russia, as far as we can tell. But our view really is that fundamentally the bull case for Japanese stocks is still very much intact. And what we’re really seeing here at the moment is a pause after that rally you mentioned last year, we’re seeing a pause which is triggered by a couple of things…

“First of all, international jitters over emerging markets and so forth, which makes Japan more of a safe haven again. And secondly, also some domestic concerns – particularly this looming sales tax increase, which kicks in the beginning of April and which people are worrying might have an impact on corporate profits.”

Weighing the Possibilities

Tara Joseph: “I was going to say, okay, so if you are saying it’s a bull case with a pause – this Japan sales tax thing is really important. Maybe hard for people to understand outside the region what it means.”

Peter Thal Larsen: “It is important. And clearly there’s an expectation that it’s going to have an impact on the economy – we don’t know how big. But the key thing to remember here is that the Bank of Japan, which actually was pushing quite hard for this sales tax increase, has also made it pretty clear that if the sales tax increase has an impact on the economy undermines its objective of trying to get inflation up to 2% and get the economy growing, that it stands ready to do more.

“So, on the one hand we are sort of waiting to see, well, what is the impact of the sales tax on the economy? On the other hand, you’ve got to bear in mind that if there is a slowdown, the Bank of Japan is ready to step in.”

It’s Simple Abenomics

Tara Joseph: “And of course we’ve seen a much more robust central bank and a much, much more robust government. Abenomics – has the steam actually come off, or are they going to come right back in and put some more cases forward?”

Peter Thal Larsen: “No, there is a lot of unfinished business in Abenomics. You know, these famous structural reforms which Abe talked about still really haven’t come through. But I think the key thing to remember with the stock market is that the Abe administration, rightly or wrongly, considers the stock market to be a sort of barometer of confidence in its own reform programs. And there are various things going on inside Japan which are designed to get people to buy more stocks…

A Tax-Free Ticket to Prosperity

“They’ve introduced these tax-free savings accounts where people can invest money tax free in the stock market, and they’re also pushing these big government pension funds to get out of government bonds and into other assets, including stocks. So we think that those factors will help to push the market, and also the Bank of Japan standing by. We still think there’s a fairly strong case for saying that the Japanese stock market will resume its upward path at some point this year.”

Tara Joseph: “Nikkei down 10% so far this year. Breakingviews says it is just a pause in a longer bull run.”