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Japanese Equities: believe the breakout, big things are happening in Japan...
Conventional wisdom has its place…
It’s often initially informed by facts and truths, and rings accurate for a time. But equally often you find that consensus narratives and conventional wisdoms have a use-by date. Their usefulness expires as the facts change (but minds don’t).
Japan is a perfect example of this.
For years, Japan has been written off as a ticking debt & demographics time bomb, a deflation disaster, and the archetype of a mature economy in decline.
But things have changed on multiple fronts, and investors have not kept up with the facts and as such, many have missed the big beautiful breakout in Japanese stocks.
For those who’ve yet to update their fact-base — after decades of stagnation, Japan has seen significant improvements in its economy (e.g. rising labor force participation offsetting demographic headwinds, benefits from friend-shoring, booming jobs growth, surging industrial capex, reviving real estate market, and cyclical upturn [n.b. see bonus chart]).
On top of that for Japanese equities, thanks in big part to Abenomics, there has been a significant improvement in corporate governance and we’ve seen rising profitability, substantial share buyback activity, and as a key litmus test: a breakout to new highs for the Nikkei 225 (it only took 35 years…!).
Meanwhile, foreign investors are still running very light allocations to Japanese stocks, valuations are cheap vs history, vs bonds, vs the upshift in long-term nominal growth, and vs global peers. In short, we’re still early here.
So I say: believe the breakout.
Key point: Japanese stocks are breaking out and there is room to run.
Bonus Chart — The Other Big Breakout…
As I touched on above, there really has been a big shift in the macro/fundamental situation in Japan. It’s one of those classic situations of slowly at first, and then all of a sudden.
Some might not like the “technical analysis“ of Japan’s nominal GDP in the chart below, but the key point and core truth in this chart is that after decades of stagnation and sideways movement, Japan is seeing what can only be described as a *breakout* in its economy.
This is such a significant chart — and perfect pairing to the first chart, because you basically have a situation of twin breakouts a breakout in price, and a breakout in fundamentals.
And while you can get false breakouts and fake-outs in price, when it’s accompanied by a fundamental improvement, the confidence level goes up.