Any upward move in interest rates would be expected to lead to strengthening of the yen, and that could be negative for equities, notes Miller.
But Coop says slightly higher inflation helps the balance sheets of Japanese companies, particularly those with debt, and improved balance sheets may justify higher equity valuations.
For this reason he feels that Japanese equities can continue to perform well.
Macro matters
From a macroeconomic perspective, Miller says one issue that has been a negative for many years is that Japanese technology companies “underinvested” in innovation for many years and so lost their advantage relative to large US and other Asian firms, with those businesses developing smartphones, for example, where Japanese companies were left behind.
He says that for the longer-term issues in the Japanese economy, the level of capital investment needs to increase.
On the impact of monetary policy, Premier Miton multi-asset fund manager David Jane says that he hedges the yen exposure in his funds, which should help to mitigate any damage to returns from higher rates, while some sectors such as banks will benefit.
He adds: “We like Japan, it’s our second-biggest region after the US. Lots of reasons, first, the valuation and reform argument — here, we have a lot of very good value mid-caps, which have been profitable but trade on very good valuations compared to other regions. Low price-to-book [ratios], strong balance sheets, etc.
“We also have some big-cap tech such as Tokyo Electron. Broadly, we think the rally in Japan and elsewhere in Asia should continue as the bull market broadens away from the [Magnificent Seven technology stocks]. It only takes a small amount of Nvidia gains to be reinvested in these markets to make a big difference.”
Amundi Investment Institute head of global equity strategy Eric Mijot is another who believes in the bull case for Japanese equities.
He says the rally has largely been inspired by improved earnings growth from Japanese companies, and that aggregate earnings grew by more than those of the US market in both 2022 and 2023.
Mijot agrees that the onset of somewhat higher inflation in Japan is likely to boost equity returns.
Policy response
TS Lombard economist Dario Perkins says that after a decade where the world had taken the view that inflation would be structurally lower in Japan, and that the rest of the world was heading in this direction, markets have started to price in inflation being higher, both globally and in Japan.
