Interesting piece published recently by Matthews Asia on their outlook for Japanese equities in 2017. Similar in tone to Peter Tasker’s (shorter) article on the brightening message from small cap Japan. 

Some excerpts / highlights from the report, paraphrased:

• Number of structural factors supporting Japanese equities in 2017
• Improved Purchasing Managers’ Indexes (PMI), accelerating wage growth and the Japanese government’s decision to expand fiscal spending for the first time in three years all bode well for the economy
• The goalposts always seem to be moving with Abenomics but some evidence of concrete changes with an improved labour market and better corporate governance
• Inflation may also accelerate this year given the weakness of the yen, rising commodity prices and an inflationary environment in the US
• Japan currently has the added benefit of political stability, which is in stark contrast to many other regions (e.g. Europe and the US)
• Investment opportunities driven by structural trends:
  • Healthcare – Japanese companies have an opportunity to be ahead of the learning curve relative to rest of the world as they are dealing with an already aged population
  • B2B services (e.g. HR, benefits) – should benefit as the Japanese labour pool shrinks and therefore becomes more expensive over time
  • Robotics – Large addressable market; automation levels are currently low in China and the rest of Asia while wage costs are rising
• Small caps under-performed last year but they expect them to normalise and catch up in 2017 if the macro tailwinds outlined above persist
  • Seeing many compelling opportunities in the small cap space, many of which are under the radar (~60% of 1,500 companies in the small cap universe have fewer than two analysts covering them)
• Primarily concerned about US policy under Trump (in particular on trade and interest rates) and the knock-on effects on Japan