2023 outlook: Japan’s equity market

In a series on how Asian markets might develop in the coming year, AsianInvestor zooms in on Japan and how investors might find value in stocks on the backdrop of a weak yen and a loose monetary policy.
2023 outlook: Japan’s equity market

Japan has seen a different scenario than many other developed countries in 2022, with Bank of Japan (BOJ) keeping interest rates low. This policy is aligned with an inflation that has not reached the levels of US and Europe, but the move has accommodated a weakening of the Japanese yen against especially the US dollar.

For a country that suffered from the so-called “lost decade” following the bursting of the economic bubble in the early 1990s and a deflationary period in the early 2000s, inflation may not be entirely bad for Japan.

Junichi Takayama,
Nikko AM

Inflation has the potential to break the vicious cycle of disinflation and low wages, which is essentially a “chicken-and-egg” problem, according to Junichi Takayama, investment director at Nikko Asset Management. Inflation, if accompanied by rising wages, could open a new chapter for Japan that has suffered from a long period of disinflation and economic stagnation.

“Wage hikes will be key in whether the BOJ decides to pivot. The annual wage negotiations take place in spring. The government, business lobby Keidanren and unions are encouraging higher wages, which would clearly be positive for consumption thanks to households’ pent-up demand following the pandemic,” he told AsianInvestor.

Kensuke Niihara,
State Street GA

If there is a turnaround of the weakness of the Japanese yen, it will post negative impact to some sectors like exporters. However, stable or higher yen could attract foreign investors who are looking for investments outside of the US, Kensuke Niihara, chief investment officer Japan at State Street Global Advisors, told AsianInvestor.

“Usually, higher interest rates will have a negative impact on equity, but value stocks will benefit from it. The potential increase in interest rates by the BOJ next year could benefit the banking sector and the over Japanese equity market which is value-oriented,” he said.


While weaker Japanese yen has different impact on various segments and sectors, it is positive for the overall equity markets in Japan. Japanese firms have delivered relatively robust earnings that are trending upward, Niihara argued.

He finds valuations of Japanese equities relatively attractive, as the price-to-earnings ratio and price-to-book ratio of the TOPIX are around 12-13 and 1.15 respectively. Those are cheaper than the 10-year average (14 and 1.27, respectively) as well as other key markets.

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One of the main macroeconomic events at play in 2023 will continue to be the supply chain constraints that have emerged in recent years. Takayama expects to see a shift away from globalization and in the other direction towards reshoring (bringing manufacturing back home), nearshoring (producing goods closer to home) and friend-shoring (deepening supply chains with trusted partners).

“Companies’ increasing focus on ESG and human rights due diligence is also expected to lead them to reorganise their supply chains and bring manufacturing and procurement closer to home. Attempts by large Japanese companies to realign their supply chains and adapt to new global constraints could inject new life into “made in Japan” in 2023, especially for manufacturing sectors,” Takayama said.

Jasmine Duan,
RBC Wealth Management

In the longer term, investors should also look for trends in domestic capital expenditure growth of Japanese companies according to Jasmine Duan, investment strategist, Asia at RBC Wealth Management.

“The government’s policy to attract high-end industries back and heightened geopolitical tension between major countries could drive more advanced technology investments back to the country,” she told AsianInvestor.


Japanese equities can face wider volatility entering 2023, driven by the correction of other major developed markets on recession concerns. Risks to be aware of include a potential US recession, delay in China’s reopening and geopolitical tensions in Asia.

Duan said the recent progress of China’s reopening could serve as a tailwind for Japan’s export and inbound tourist recovery that has already taken off this quarter with Japan’s reopening and fueled by the weak yen.

Spending by inbound tourists amounted to ¥4.8 trillion ($253 billion) in 2019, or 0.9% of Japan’s GDP. While this spending may not immediately return to such a level due to an absence of visitors from China, the yen’s significant weakening is expected to drive a recovery in both the number of tourists to Japan and the amount of money they spend.

“Cyclically, the Japanese economy is well positioned to benefit from the recovery of domestic activities as well as the reopening of borders. We believe it could be one of the highest growth countries among developed markets in 2023,” State Street’s Niihara said.

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