The case for Japanese equities

jul 24, 2017

Key points

  • We see an encouraging earnings outlook, low valuations and ongoing ultra-easy monetary policy helping to sustain the Japanese equity rally.
  • Markets took comfort in European Central Bank (ECB) and Bank of Japan (BoJ) decisions to hold pat; global equities hit new highs.
  • Corporate earnings season kicks into high gear in the U.S., Europe and Japan this week, and is meeting with high market expectations.

We see further strength in Japanese equities after their recent rally, given an encouraging earnings outlook, relatively low valuations and a stable yen under Japan’s ultra-easy monetary policy.

Japanese equity performance and valuation, 1990-2017

Japanese equity performance and valuation, 1990-2017

Sources: BlackRock Investment Institute, with data from Thomson Reuters, July 2017.
Notes: Japanese equity performance is represented by the Tokyo Stock Price Index, or TOPIX. The price-to-earnings ratio (P/E ratio) is based on 12-month forward aggregate estimates.

Japanese equities are approaching peaks they have struggled to climb over in past decades. Is this time different? We see reasons for optimism. Valuations (green line) are lower than at previous high points in stock market performance (blue line). Moreover, Japanese stocks appear inexpensive on the global stage — trading at a 20% discount to U.S. peers on a 12-month forward price-to-earnings basis.

More than just valuations

Low valuations alone are not a reliable buy signal, yet we find an improving earnings outlook adds to the appeal of Japanese equities. We expect Japanese companies’ earnings growth to hit a three-year high in 2017. A sustained global economic expansion is boosting overseas earnings, while wages are rising just enough to bolster domestic consumption without eroding profit margins. The recovery in earnings also reflects companies’ greater focus on shareholder returns. Profitability among Japanese companies has been improving, but remains well below that of other developed markets. Return on assets, a gauge of corporate efficiency, has risen back toward pre-crisis peaks, and Japanese companies have undertaken significant deleveraging. Earnings, meanwhile, are rising faster than dividend payouts and buybacks, and this provides considerable scope to improve shareholder returns.

The BoJ’s equity purchases and domestic investors’ increasing preference for stocks provide further support. Our analysis shows Japanese equities remain far from a crowded trade, as foreign investor inflows have recently subsided. A further support is the BoJ’s ultra-easy monetary policy, which contrasts with a normalizing Federal Reserve and a looming step change in the ECB’s monetary stimulus. We see this helping keep the yen in a stable trading range. Any sharp rise in the currency is a main risk to the Japanese equity rally.

Bottom line: We are overweight Japanese equities (currency-hedged in the case of non-Japanese investors), and prefer stocks with foreign earnings growth.


  Date: vertical line Event
July 24 Japan manufacturing Purchasing Managers’ Index (PMI); Germany, eurozone and U.S. composite PMIs; OPEC and non-OPEC countries meet
July 26 Fed rate meeting with possible announcement of start date for shrinking balance sheet; UK second-quarter gross domestic product (GDP)
July 28 U.S. Employment Cost Index, second-quarter GDP; Japan Consumer Price Index (CPI)

Nearly 40% of the S&P 500 and STOXX 600 indexes and 30% of Japan’s TOPIX, as measured by market capitalization, will report earnings this week. We expect solid results, but a stronger-than-expected euro could potentially pressure some European earnings.

  • The ECB and BoJ kept policy unchanged. Expectations for the ECB to announce a tapering of its asset purchase program in September cooled, and the BoJ pushed back the expected date for reaching its inflation target.
  • The U.S. dollar index fell to an 11-month low, as the U.S. administration’s policy agenda hit a hurdle when potential health care reforms stumbled in Congress.
  • Global equity indexes hit record highs. Commodities from iron ore to crude oil rallied as China’s growth beat expectations and U.S. oil inventories fell.

Global snapshot

Weekly and 12-month performance of selected assets


EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps 0.6% 10.4% 14.2% 2.0%
U.S. Small Caps 0.5% 6.6% 20.9% 1.2%
Non-U.S. World 0.7% 17.7% 20.1% 3.0%
Non-U.S. Developed 0.5% 16.5% 19.5% 3.2%
Japan 1.5% 12.2% 16.9% 2.1%
Emerging 1.3% 24.7% 24.5% 2.5%
Asia ex-Japan 1.4% 28.2% 26.3% 2.4%
BondsWeekYTD12 MonthsYield
U.S. Treasuries 0.5% 2.4% -1.6% 2.2%
U.S. TIPS 0.5% 1.3% -0.2% 2.2%
U.S. Investment Grade 0.8% 4.9% 2.4% 3.1%
U.S. High Yield 0.6% 5.9% 10.4% 5.4%
U.S. Municipals 0.7% 4.5% 0.6% 2.2%
Non-U.S. Developed 1.8% 8.2% -0.2% 0.8%
Emerging Market $ Bonds 0.8% 7.2% 5.0% 5.3%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil -1.7% -15.4% 4.0% $48.06
Gold 2.1% 9.4% -5.7% $1,255
Copper 1.3% 8.5% 20.7% $6,004
CurrenciesWeekYTD12 MonthsLevel
Euro/USD 1.7% 10.9% 5.8% 1.17
USD/Yen -1.2% -5.0% 5.0% 111.13
Pound/USD -0.8% 5.3% -1.8% 1.30

Source: Bloomberg. As of July 21, 2017.
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective

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Richard Turnill
Global Chief Investment Strategist, BlackRock Investment Institute
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active ...
Isabelle Mateos y Lago
Chief Multi-Asset Strategist
Kate Moore
Chief Equity Strategist
Jeffrey Rosenberg
Chief Fixed Income Strategist