Japan: A New Quiver of Arrows?

With a new Prime Minister taking the helm in Japan, what does the future hold? Franklin Templeton Investment Solutions’ Gene Podkaminer and members of the research team take a look at both local and global trends influencing Japan—and why investors should pay more attention to the country.

Overview and Key Points

Japan’s economy is at the confluence of many macroeconomic trends, both local and global. Local elections have given way to a new Prime Minister, Fumio Kishida, and our attention is piqued as policy often leads macroeconomics. Globally, Japan has a unique exposure to two key themes: COVID-19 and global trade. Japan has emerged as a leader in COVID vaccination rates after initially lagging the broader world. Japan also has a front-row seat to the world’s global trade issues as its key export industries, like the automotive industry, are entangled in the global supply chain. This combination of local and global themes leads us to focus on Japan and further explore these topics and their multi-asset implications.

  • Newly elected Prime Minister Fumio Kishida should continue to support easy monetary policy while aiming to employ expansionary fiscal policy by developing a considerable stimulus package.
  • Japan’s rapid vaccination and macro momentum – Japan has evolved from a laggard to leader in COVID-19 vaccination rates. Substantial progress this summer led to the end of Japan’s State of Emergency lockdown in October. Since then, Japan has started to experience positive economic momentum. Our macro outlook for Japan is encouraging.
  • Economic Momentum Meets Familiar Risks – Fiscal aspirations are not new to Japan, but most fiscal plans have fallen short over the past decade. Instead, aging demographics have proven to be a formidable headwind to growth. Additional economic risks revolve around global trade and rising energy prices.
  • Multi-Asset Considerations – Japanese equities are relatively cheap, but that is nothing new. Equities could potentially benefit from an improving Japanese macro backdrop alongside strengthening corporate fundamentals. Government bond yields are expected to remain anchored by continued easy monetary policy from the Bank of Japan (BoJ), which is also a relative advantage to Japanese equities as interest rates lurch higher elsewhere. The yen has attractive defensive characteristics for a multi-asset portfolio but faces some headwinds from rising interest rate differentials and worsening terms of trade.