Can Yoshihide Suga help revive Japanese stocks?

Japan’s benchmark Nikkei 225 Index has had a more or less flat performance so far this year. As of 8 October, the index was down less than 0.1% for the year to date.

During the market sell-off earlier this year, Japanese stocks were not left untouched. The Nikkei 225 fell as low as JPY16,358.19 on 19 March but has climbed 44.6% since then.

Meanwhile, the broader Tokyo Stock Price Index (Topix) is down 43.8% for the year to date through 8 October, but has risen 33.9% from its 52-week low of JPY1,236.34. As Japanese stocks plummeted in March, both the Nikkei 225 and Topix traded at their lowest levels since 2016.

Japan’s economy is continuing to recover from the fallout of the coronavirus pandemic, so Japanese stocks are expected to see improving performances. Could this be helped along by a change of leadership at the top? 

  

Japan’s slow economic recovery

The COVID-19 crisis has left Japan’s economy in the middle of its worst downturn since World War II. Although the Japanese government never enforced a lockdown or penalties for breaking rules, a national state of emergency was declared in mid-April. This caused jitters among companies in certain industries and added to losses already suffered earlier in March.

One segment beset by issues in Japan, as elsewhere, was the airline sector. ANA Holdings [9202] fell 24.8% in the week from 30 March to 3 April, before climbing 10.9% the following week.

Between 9 April and 7 May, concerns that travel restrictions would result in plummeting passenger numbers made the stock reverse by 15% to a low of JPY2,117 — a price the company hadn’t traded at since 2014. Since then, the stock has recovered by 15.2% (through 8 October).

Ongoing speculation regarding travel restrictions also led shares in East Japan Railway [9020] to decline by 12% in the week commencing 30 March. West Japan Railway [9021] dropped 9% in the same week. 

Unsurprisingly, stocks that had the potential to benefit from the work-from-home revolution did see their prices surge. Cloud video conferencing firm V-Cube [3681] soared 97.8% between 19 March and 1 April — it gained more than 20% on the first day of the month alone.

  

The share price of elearning solutions company Kushim (formerly iStudy) [2345] reached an all-time intraday high of JPY1,823 on 2 March before falling to a 52-week low of JPY607 on 23 March. From then through to 2 April, the share price jumped 128.1%. Like V-Cube, Kushim saw big gains — of 28.8% — on the first of the month. 

Any stock market misery caused by concerns regarding a potential lockdown were compounded when the Tokyo 2020 Olympics was pushed back by a year. Hospitality, tourism and infrastructure stocks, including real estate groups with stake hotels, were hit hard. 

 

Can the Japanese stock market expect a ‘Suga’ high?

An already bad economic situation was made more precarious by the resignation of long-standing prime minister Shinzo Abe, who resigned on 28 August, citing poor health. The challenge for the incoming prime minister, Yoshihide Suga, will be to revive the flagging economy.

This will not be a straight-forward task. Having only been appointed on 16 September, there’s been a mixed reaction from investors in the Japanese stocks. 

Suga hopes to have outlined a plan for a national digital agency by the end of the year. The agency will focus on promoting the digitisation of the private sector, overhauling the government’s digital infrastructure and introducing new business models that leverage the internet.

Tech stocks responded positively in reaction to this news on 18 September.

Fujitsu [6702] rose around 5.2% from 18 to 23 September, making up for losses earlier in the month as a result of the US tech rout’s global shockwaves. Nippon Telegraph and Telephone’s data business NTT Data [9613] has gained around 4.2% in the same period. 

  

Richard Kaye, analyst for Japan at the Comgest Growth Fund, has argued the country’s transformation under Suga could be like Apple’s growth post-Steve Jobs, according to Citywire Selector.

Conversely, Suga’s plans to keep mobile phone tariffs low has seen share prices pull back in the telecoms sector. Suga also announced that he wanted to end the dominance of the country’s three main mobile operators, one of which is Nippon Telegraph and Telephone [9432], which fell 0.5% between 18 and 23 September.

Another, KDDI [9433], saw a similar decline of 0.4% in the same period and, as of 8 October, is trading close to its 52-week low of JPY2,604. 

Overall, though, the Nikkei 225 and Topix indices have remained relatively flat since Suga’s appointment.

 

Warren Buffett’s bet on Japanese stocks

There will clearly be hurdles ahead for Suga, as further news of future policies and reforms will undoubtedly be major drivers of stock market moves. New labour laws and increased female participation in the economy have been identified as having the potential to move share prices in a positive direction. 

In the near term, the Nikkei 225 and Topix could get a boost thanks to Warren Buffett, founder of Berkshire Hathaway. He recently invested $6bn in Japanese stocks considered inexpensive and undervalued. This includes the country’s five major trading houses — referred to as sōgō shōsha in Japan — Itochu [8001], Marubeni [8002], Mitsubishi [8058], Mitsui [8031] and Sumitomo [8053].

Jamie Rosenwald, Dalton Investment’s senior portfolio manager of Asia and Japan investments, told Reuters that Buffett had bagged himself a bargain. Buffett’s bet on the country’s largest trading houses shows the “tremendous values available in Japan today”.