That is not to say Vandenabeele sees Japan as risk-free. She notes, for example, a degree of political risk emerging in the leadup to and fallout from Prime Minister Shigeru Ishiba’s resignation as leader of the coalition-leading LDP. Vandenabeele notes that Japan has struggled with weak coalition governments over recent years and that the latest political shift opens up potential risky avenues. That might involve a more conservative pivot with the LDP taking a more anti-immigrant stance, which could be less economically advantageous. There could also be more political pressure to keep interest rates low. There could also be the possibility of a more pro-growth leader emerging in Japan, which might be more of a political risk to the upside for Japanese equities.
In addition to domestic politics, Japan’s agreement to invest $550 billion over three years in the United States might come with some serious implications. That sum of money is equivalent per year to the value of Japan’s US exports, and the structure of the deal comes with lopsided profit sharing, potentially limited upside, and challenging optics for Japan. Should Japan re-neg on that deal, tariffs could be imposed at higher rates and the Japanese economy might be at greater risk again.
Vandenabeele also sees a risk that the BoJ capitulates or takes too cautious of a line with its rate policy. The symbolism of a central bank that has given up on normalizing rates could derail FX markets and see the yen depreciate again. Despite all these risks, she sees a picture of broad resilience in Japan.
For Canadian investors now looking at Japan, Vandenabeele says that the country’s emergence from a period of constant stagnation will see a new set of winners and losers emerge. FinTechs, domestic focused companies, and consumer-oriented companies may set the tone on equity markets, rather than exporters. Japanese startups are emerging, too, with success in areas like space exploration. Vandenabeele argues that in this environment, an active and bottom-up approach can prove advantageous in accessing upside in an enormous market.
“it is a huge market with world class companies, so you do want exposure to it. And it’s also a market where investors go through phases of focus and defocus,” Vandenabeele says. “Periods like now where things are a bit down, but not out, these are times of opportunities. I think it would be a mistake to ignore it.”