This year has certainly been an eventful one for Japan, with the ongoing battle to contain Covid, the delayed and controversial staging of the Olympics, and yet another change in Prime Minister among the notable events. What might next year have in store?

 

Making predictions, even for just a year ahead, is fraught with potential to look foolish. Any “outlook for 2020”, inevitably written shortly before the phrase novel coronavirus began featuring in headlines, probably had a useful lifespan shorter than the Christmas decorations. Despite that caveat, we’re as confident as we can be that the following themes will have resonance for investors in Japanese equities in 2022 and even beyond.

1: A quiet man, but with big ambitions

Fumio Kishida was few people’s favourite for Prime Minister, apart from his powerful parliamentary colleagues, and it would be a surprise if his tenure is a long one. All eyes are on his efforts to push through a sizeable economic stimulus package, designed to catapult the country out of its Covid-related malaise. This is an error. Japan has a rich history of supplementary budgets and stimulus packages with little to no lasting impact on the real economy or financial markets.

 

However, for a quiet man Kishida has been surprisingly profound in his call for “new capitalism”, especially in a country with an ambivalent relationship with the old one. A move to a more interventionist style of government, as one might presume a new capitalism would entail, would be in line with global trends but investors will still want to be alive to what this might mean in a Japanese context. State-directed strategic investment in semiconductor manufacture might create pockets of opportunity, for example, but an overbearing government influence on the corporate sector constitutes more of a risk. Negotiating this new landscape will be a key challenge in 2022.

2: Time to stop just talking about the environment

If 2021 was about talking about the environment – most notably at the COP26 – then 2022 and thereafter will be about doing. For its part, Japan’s government has committed to cutting greenhouse gases by 46% by 2030 and to be Net Zero by 2050. Many of its companies are leaders in aspects of low carbon technology, as their piles of patents will attest. Yet the country refused to sign the pledge in Glasgow to phase out coal power and is the only G7 country building new coal fired power stations domestically. Some of its most emblematic companies are car makers sitting right in the bullseye of the environmental dartboard.

 

The environmental challenge facing Japanese companies is a multi-decade one, but the coming year could be a crunch period for setting the course for the mid to longer term. Even the least ecologically aware investors will be looking for companies which can contribute to the government’s – indeed all governments’ – new project. Expect those companies with green gems sitting in their R&D departments to start talking about them more, and for Japan’s increasingly rich pipeline of new stock market listings to feature more environmental solutions companies than before. The most interesting developments in the coming year could be from those companies with the biggest contributions to make: the car makers. One thing is clear, some cars will be in front and others will be left behind.

Countries of origin for international patent families

Source: European Patent Office

3: Will Japan achieve escape velocity from deflation?

In 2022, diners at Yoshinoya, a restaurant chain, will have to stomach more than just the signature gyudon or beef bowl, they will also have to swallow a ten percent price hike. As global prices surge, will 2022 mark the year that Japan finally escapes the gravitational pull of its deflationary mindset?

 

Maybe, but probably not. Food companies appear to be the exceptions rather than the rule, as general consumer prices remain stubbornly muted. Japan’s ageing population, along with persistently weak wage growth, acts as a brake on consumption and dampens inflationary forces. The Bank of Japan wants consumer price inflation and the Government is urging companies to bump up wages, but it does so more in hope than expectation.

 

Pricing power will be key. Without it, companies will be squeezed between the unstoppable force of global inflation and the immovable object of the Japanese consumer. On this basis alone the difference between the winners and the losers in 2022 is likely to be starker than ever.

The value of active minds: independent thinking

 

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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