Macroscope | US-China tensions leave Japan in geopolitical, financial sweet spot – for now

Right now, Japan ticks many of the boxes that matter to fund managers, thanks to its geopolitical appeal and outlier status on monetary policy

It is by no means immune to the turmoil in the global economy, however, especially if China’s economy continues to struggle and the US slips into recession

Reading Time:3 minutes

Fruit and vegetables for sale at the entrance to a supermarket in Tokyo on October 7. Household consumption in Japan fell in September for a seventh month in a row with wages remaining lacklustre, showing that Japan’s status as a safe haven amid growing geopolitical uncertainty is not bulletproof. Photo: AFP

Published: 3:30pm, 19 Oct 2023

As another geopolitical crisis threatens to escalate dramatically and a disorderly sell-off in global debt markets compounds the fallout from the steep rise in interest rates, the list of safe havens that investors can retreat to is getting shorter and shorter.

Even the supposedly stable United States Treasury bond market – the bedrock of the global financial system – has become exceptionally volatile. Since August 31, the yield on the benchmark 10-year Treasury bond has surged from 4.1 to 4.9 per cent, its highest level since 2007. The move was so sharp that analysts have struggled to explain the cause of the sell-off.

While there is no such thing as absolute safety in times of extreme turbulence – even the price of gold, long touted as the ultimate haven asset, has proved volatile in recent years – there are plenty of examples of assets that outperform.

Yet, every so often a new investment theme emerges, usually based on a particular trend as opposed to a specific sector. Investors love a good story, especially one that is about economic resilience and is underpinned by a confluence of favourable shifts in the global economy. Right now, Japan ticks many of the boxes that matter to fund managers.

While Asia’s second-largest economy has been a notoriously fickle market for equity investors, holding much promise yet ultimately proving to be a disappointment, there are reasons to believe this time might be different.

Since the start of this year, the Topix – one of Japan’s main stock market indices – has soared 20 per cent, outperforming the buoyant S&P 500 and outpacing the gains of the Nifty 50, one of the gauges of India’s booming equity market. Although Japanese shares are still trading below their all-time high in December 1989 – just before the bursting of Japan’s epic asset bubble – the last time the Topix stood at such a lofty level was in 1990.

.css-1m2rp1p{color:#34b8b5;}Macroscope | US-China tensions leave Japan in geopolitical, financial sweet spot – for now

Macroscope | US-China tensions leave Japan in geopolitical, financial sweet spot – for now