Bi-Weekly Geopolitical Report – Is Japan’s Sun Rising Again? (February 6, 2023)

Patrick Fearon-Hernandez, CFA | PDF

Ever since Japan’s “bubble economy” imploded at the end of the 1980s and its population began to fall in the 2000s, investors have tended to dismiss the country’s financial markets as well as its geopolitical and economic standing.  Japan’s pacifist constitution and its diplomatic deference to the United States constrained its international influence, while its slow economic growth, rising debt, and ultra-low inflation made its business environment seem sclerotic and stagnant.  Likewise, through much of the past few decades, Japanese stocks and bonds have not offered investors much to get excited about.  In U.S. dollar terms, the MSCI Japan stock index including gross dividends only returned 5.5% per year in the two decades prior to 2022, versus an average total return of 9.8% for U.S. stocks.

Japan had plenty of false dawns in recent decades, which raised hopes for a rejuvenated society and economy.  In this report, we explore whether the country could finally see reinvigorated economic growth and investment returns, not so much because of economic reforms like it has tried so often in recent years, but because of its unique role in the evolving geopolitical environment.  Diving deeply into Japan’s geopolitical position, economic situation, and financial market valuations, we will explore whether the country might find the catalyst needed to boost its power and growth again.  We also lay out the specific investment implications for a range of asset classes.

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There will be no accompanying podcast with this report.