Page 17 - DIY Investor Magazine | Issue 31

The pick-up in the pace of vaccinations means Japan was able to lift its state of emergency - which covered most of the population - at the end of September. While Japan has benefited from the broader global economic recovery this year, we should now start to see the domestic economy re-open and recover. Restaurants in certain areas still need to close relatively early, and some are restricted from serving alcohol unless they have certification for their anti-Covid measures. However, domestic travel is now back on the agenda and large-scale events can go ahead with a greater number of spectators. DOMESTIC DRIVERS TO BENEFIT SMALL CAPS We expect smaller companies in particular to benefit from this domestic re-opening. Small caps generally have much greater exposure to the domestic economy than their larger peers. Companies operating in the service sector could now see stronger demand as travel, tourism, leisure and other consumer industries see demand and activity pick up. Japanese consumer confidence is gradually recovering and this should bode well for companies exposed to the domestic consumer. Small caps are a part of the market that we typically like, and many small caps are exposed to the domestic service sectors where we now anticipate a strong recovery. As a long-term fundamental investor, there is often a greater opportunity to add value given how under-researched some of the companies are, compared to the larger Japanese companies. ‘WE’VE ALREADY SEEN IN RECENT YEARS HOW GOVERNANCE FACTORS HAVE BECOME MORE IMPORTANT’ POLICY TO CONTINUE, BUT ENVIRONMENT RISES UP AGENDA In terms of government policy under Mr Kishida, we largely anticipate a continuation. A new supplementary budget and further stimulus is already under discussion. This stimulus package will likely focus on additional support for those who suffered financially during the pandemic. Some of the headline measures regarding these may be announced before the general election although the detail will follow later. One area where we have seen some change this year is on environmental issues. With COP26 fresh in the memory, Japan is among a number of countries that have pledged to reach net zero carbon emissions by 2050. What’s more, outgoing PM Suga also declared a more ambitious goal: that of cutting emissions in 2030 by 46% relative to 2013 levels. The debate about how Japan will achieve these targets look set to intensify. We’ve already seen in recent years how governance factors have become more important and are being reflected in share price performance. We anticipate a similar impact from environmental and social factors going forward. It is perhaps relatively early days but we need to be prepared for potential changes in corporate and investor behaviour on these issues. Overall, the Japanese market is one where earnings momentum is still accelerating, compared to other regions where upward revisions may have peaked as the chart below shows. This corresponds to the path of Japan’s slower vaccine roll-out and longer-lasting restrictions. We think the political noise around changes in prime minister should not distract investors from the brighter economic picture in the domestic Japanese market. 17 Diy Investor Magazine · Nov 2021