In August, mixed returns were seen for both segments. The TOPIX Total Return index ended +0.51% over the month whereas the Russell Nomura Small Cap index declined 3.2%.
The lower global growth expectation, the clouded outlook of post Brexit Europe and the yen strength this year has inevitably resulted in an earnings outlook downgrade for Japanese companies. The stock market over the last few months has reflected this change.
We believe the mid to longer-term prospects for the Japanese equity market, however, remain attractive as the domestic economy is at a rare transitional phase, moving from a period of contraction to one of expansion.
The market sell-off this year has been largely due to external factors, and while Japan will be affected by any global slowdown for a period, the country has a large domestic base and can weather such turbulence much better than most economies. Contrary to Japan’s image as export dependent, reliance in terms of GDP is only about 15%, much smaller than most countries in Asia or Europe.
The lower oil price is positive for corporate profits overall. We believe that Prime Minister Abe and the Bank of Japan are committed to ensure that economic recovery continues and to achieve their goals of ending deflation and guiding Japan back to a growth path. Abenomics stage 2, announced at the end of September last year targets a 20% increase in nominal GDP, to be achieved in the early part of the next decade. It will also tackle the population problem, to raise the fertility rate from 1.4 to 1.8.
It is the first time in many decades that the government has announced a top down macro numerical policy target. This positive development does not appear to have been reflected in the market at all as, particularly during this period of market turbulence, as there is a tendency to focus even more on the short term.
Miyuki Kashima, head of Japanese Equity Investments at BNY Mellon Investment Management