Domestic buying offering a further boost to Japanese stocks

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With the Abe administration set to pursue its ambitious “third arrow” of extensive structural reform, domestic appetite for Japanese equities is likely to drive future stock market gains, according to Simon Somerville, manager of the Jupiter Japan Income Fund.

In our view, the Abe administration has achieved a huge amount in the last twelve months after years of significant government inaction. The Japanese market has rallied again over the last month, as the economy, which many had feared would wobble following the consumption tax rise on 1 April, proved more stable than some had expected. Concerns that the ensuing uncertainty would result in global investors lightening their exposure to the region proved valid, but the ambitious “third-arrow” reforms re-fired by Prime Minister Shinzo Abe appear to have stayed on course.

Domestic investors have been the key drivers of the recent rally in Japanese equities. We think this has mainly been due to public pension funds raising their equity exposure and a large increase in share buybacks. We expect domestic buying to continue as many NISA (Japanese ISA) accounts that are still holding cash are expected to invest into equities. In addition, we believe the giant $1.2tn Government Pension Investment Fund is likely to raise its target for domestic equities in the coming months.

Economic data remain mixed following the VAT increase, with housing starts still falling, while retail sales, auto production and small business confidence have begun to recover. The employment market has continued to improve, with the unemployment rate falling to 3.5%. This has supported crucial wage rises, and we believe this will be a key factor in Japan achieving its 2% inflation target. The Diet passed nine of the ten planned reform bills in its winter session and has made significant progress in the more recent session. In the agriculture and electric power sectors, reforms have been agreed and enacted to some extent, as has the establishment of special economic zones. Though the pace of change may be slow, we think the extent should not disappoint.

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