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Tuesday 22 February 2022

Webinar Video + Report - Prospects for Japan and Asia in 2022 and Beyond

Webinar Video + Report - Prospects for Japan and Asia in 2022 and Beyond

After two years in which Japan and the rest of the world had to face issues on an unprecedented scale, as we move into 2022, it is now time to turn our attention to the future. In our first webinar of the year, on Wednesday 26 January 2022, Japan Society’s Chairman Bill Emmott was joined by two expert analysts: Jesper Koll, former Chief Strategist and Head of Research for U.S. investment banks J.P. Morgan and Merrill Lynch, and current Expert Director for the Monex Group and the Japan Catalyst Fund, and Jim McCafferty, 2008 Financial Times AIM analyst of the year, and Joint Head of APAC Equity Research at Nomura since 2015. Together, the two speakers provided a deeply insightful and important discussion, touching on a diverse spread of topics ranging from politics and economics to Covid-19 Policies, not only in Japan, but also more widely in East Asia as a whole.

The discussion began with Jesper Koll discussing how Japan is finally seeing evidence of positive wealth effects, with average house prices in Tokyo now higher than at the peak of the Japanese Economic Bubble in 1990. Another important point is the current value of the yen, now as weak as in 1974/1975. This has led to an inflation differential between Japan (no inflation) and several other strong economies (inflation), giving Japan’s industrial sector a considerable boost in competitiveness. Also, Japan’s scarcity of labour is leading to a “war on talent” which is bringing changes to how leading companies compensate their employees. Koll gave the example of the Hitachi Corporation, which is moving away from the system of seniority-based compensation usual in Japanese companies, and is introducing a skills-based compensation system. This type of change, Koll argues, “will improve the liquidity, as well as the confidence, in the Japanese labour market, and is a big change in the terms human capital actually being deployed”. Moreover, he believes it will be a positive driver behind Japan’s consumer spending. Finally, he stressed the importance of the members of the committee appointed by Prime Minister Fumio Kishida in bringing his “New Capitalism” ideal to fruition. Half of the committee is female, quite uncommon in Japan, and the average age of the members is very young, with many being recent and successful entrepreneurs. Koll believes that this committee will bring an “added deregulation drive and pro-growth initiatives”.

McCafferty shares a lot of Koll’s optimism and, in fact, advocates global investors to “take money out of the US and put it into Asia”. The US market is incredibly expensive and priced for perfection, while companies in Asia tend to be more conservative. He exemplifies this with the case of an American streaming company which missed its earnings, and had its stocks drop by 25%. Looking at the “big” Asian economies (China, Korea, Taiwan and Japan), “half of the listed companies out there are sitting with cash on the balance sheet”, he states, meaning this type of situation tends to be less common. Another reason would be the existence of exciting companies such as TSMC (Taiwan) and Samsung Electronics (Korea), which “have got characteristics not dissimilar to the US in terms of their prospects for growth, but actually are trading on very significant valuation discount”. He concluded by stating that Nomura is advocating a positive view on the Asian markets in 2022, with an estimate of double digit returns during the calendar year. He does address one caveat in his projection: countries are trying to balance inequalities between wealthy and poor people. He gives the example of PM Kishida’s parliamentary speech, in which one of the main points was a push for equality. As McCafferty explains, this means countries will be more willing to tax wealthy individuals and financially healthy companies, both common in East Asia, to “even out” the aforementioned inequality. As he explains, “from a stock market point of view, incremental tax is really feared by investors. So, while we do like Asia in relative to other markets globally (…) the idea of addressing inequality could be a spanner in the works for equity markets around the region”.

In the Q&A session, McCafferty reflected on Covid motivated border closures commenting that China is in a unique position compared with other East Asian Countries. While in Japan, Taiwan and Korea foreign investors own 35 to 40% of those equity markets, in China it is only 10%. China relies much more on domestic consumption. Therefore, the impact of zero Covid policies in China ends up having very limited impact due to its GDP composition.

On PM Kishida’s policy of “new capitalism”, Koll believes that it will not translate into significant changes in tax policy, pointing out Kishida’s refusal of raising capital gains tax. However, he believes Japan will aim to make the government more efficient by cutting entitlements, eliminating redundancies and taking greater advantage of digitalization, as well as forcing price cuts in regulated markets and utilising increased price pressures.

Koll also commented on how Japan’s current demographic crisis influences his optimistic view of Japan. While there has been a record low number of Japanese turning twenty years old, and starting salaries have remained stagnant for the last 20 years, the quality of contracts is improving significantly, meaning that more young people have been able to achieve regular employment. He also added that 70% of all net financial assets in Japan are owned by people who are over sixty. This means that in the coming years, “somewhere between 400 to 600 trillion yen will become unstuck because of inheritance (…) and that flow ultimately generates jobs”.

To conclude the speakers were asked about possible pessimistic outlooks on Japan for 2022, with McCafferty stressing the possibility of Kishida taxing investors, which could have negative consequences for the stock market, and Koll mentioning the danger of the Yen appreciating in value, and a possible currency war with China.

Report by Gonçalo Navega


Watch the Webinar Highlights


Webinar Full Video

The full video of the webinar is now available on the Japan Society YouTube channel. You can find all the details and more recordings from the webinar series here.