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Can the Japanese Stock Market Rally Continue?

What has caused Japanese stocks to reach a 21 year high? And how will Sunday's up-coming election impact markets? Emma Wall talks to Mohammed Syed of Coutts

Emma Wall 19 October, 2017 | 11:16AM

 

 

 

Emma Wall: Hello and welcome to the Morningstar Series "Market Reaction". I'm Emma Wall and I'm here today at Coutts with Mohammed Syed to talk about Japan.

Hi Mohammed.

Mohammed Syed: Good morning. Welcome.

Wall: So, we have hit a 21-year high in the Japanese stock market. What has caused this fantastic rally?

Syed: I think a number of factors. Least of all – all the structural reforms that have quietly been taking place in the background over the last decade. And they are both fiscal, they're both monetary, but also actually the reforms around tax, reforms around how industry operates and also the export drive that Japan's always led, but it certainly changed from where it used to be from Western Europe, US to also now Southeast Asia and to China. So, all of those have led to a strong growth, strong earnings and so we see that manifest itself in a 21-year high.

Wall: It sounds like politics has played an important part in this rally then, which leads to my next question. The snap election in Japan that’s upcoming. People are calling it the most exciting election in Japanese history, why is that?

Syed: I'm not sure people in Japan would see it that way, I think we see it from a western lens that it's exciting. I think it's different because they've never had snap elections of that nature before historically. It's also around a lot of structural reforms that they would like to implement and so that gives them more confidence once they get in. Tax would be huge driver. I think monetary policy; how banks operate, how the system overall operates. So, I think it's interesting from that angle that they have called a snap election when historically they haven’t and B, they didn’t have to. But I think to speed the pace and speed of reform we feel that the political parties felt that if we get the mandate we can move faster.

Wall: Do we expect Abe to win again then?

Syed: I think so, yeah. I also think politically the economic resurgence that we've seen and the growth will be agnostic to who gets in. Because structural reforms once they are bedded in and they have had the foundations they carry on irrespective of the political party that gets in.

Wall: And then so presumably the stock market continues to rally as well.

Syed: Yes, that’s our view. And it continues to grow. There is a lot of strong earnings. There are some great companies and a lot of the companies sometimes from a Western lens aren’t the ones that one would associate generally with. So, it's not necessarily the Sonys, the Toyotas et cetera the big manufacturers. But it's also some of the smaller the mid-sized, the SMEs. SMEs in Japan in a UK context are actually fairly significant companies domestically. So, an example would be robotic companies.

So, Japan is roughly 8% market cap from a global perspective, robotics is 25% of the global market and they have been doing this for a considerable period of time. So, both robotics and therefore artificial intelligence. The driver had been demographics. So ageing population they need help, they need a social security blanket that wasn’t quite there to the extent that they thought they needed it. So, robotics has suddenly popped up. So, there is an array of robotic companies that have come up and that’s just an example of some of the structural changes that have taken place.

Wall: Mohammed, thank you very much.

Syed: Thank you.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk