Japan Equities: Uncertainties Ease?
Chart of the Week:
Powell’s Dovish Remarks Spur Cut Bets; Fiscal Gains, Steeper Curve
Powell’s dovish tone at Jackson Hole boosted expectations for a September cut, with futures now pricing in two cuts by year-end. U.S. data remain resilient, with a modest labor market slowdown but no clear recession threat. July headline and core PCE came in at 2.6% and 2.9%, keeping inflation risks alive.
Market Recap 1:
Rate-Cut Bets Fuel U.S. Equity Rally Despite No Clear Slowdown
U.S. equities rallied broadly last week, with all three major indexes hitting intraday and closing record highs. Markets interpreted Powell’s remarks at the global central banking forum – noting that “policy remains restrictive, but shifts in outlook and risks may require adjustments” – as dovish, lifting expectations for a September rate cut. Concerns over Fed independence and long-term inflation risks were largely overlooked, keeping sentiment upbeat.
Market Recap 2:
Powell Strengthens September Cut Bets: Bonds Rise, Dollar Falls; Lower Yields Lift Gold
Trump’s continued pressure on the Fed, alongside Powell’s comments, reinforced expectations for a September cut, driving a bond rally. Markets largely overlooked Fed independence and long-term inflation risks. The curve shifted lower overall, but with long yields falling less amid stable economic conditions, the curve steepened. Long-duration bonds, more sensitive to rate moves, outperformed, lifting the broader market.
What’s Trending:
Korean Defense Exports Rise on Sustained Global Arms Demand
The Russia-Ukraine war has created equipment shortfalls requiring replenishment, while Europe’s “rearmament plan” further supports Korean defense firms. This month, Poland purchased 180 K2 tanks from Korea in a $6.7bn deal. Beyond Europe, Vietnam signed for 20 K9 howitzers, adding to a global client base that includes India, Finland, and the UAE.
In Focus 1:
U.S.-Japan Deal Offers Brief Relief, But Corporate Earnings Face Tariff Test
TOPIX and Nikkei 225 have hovered near record highs since mid-August. TOPIX currently trades at ~15x P/E, slightly above the 10-year average but still reasonable. Recent factors supporting Japanese equities include:
1. Markets widely expect the Fed to cut in September despite no clear recession risk.
2. With Japan inflation easing and under control, the BoJ may hike twice next year to 1.0%, while the Fed could cut twice this year. The yen is expected to appreciate only modestly, posing little equity risk.
3. The U.S. pledged to revise reciprocal tariffs and refund excess duties retroactive to Aug 7, easing concerns and boosting sentiment.
In Focus 2:
Buybacks and Reform Support Japan Equities Long Term; Wage-Price Cycle Intact, Favor Domestic Plays
Over the medium to long term, governance reforms, rising buybacks, and reduced cross-shareholdings will provide structural support to equities. Japanese firms are expected to keep strengthening balance sheets, raise payout ratios, and increase capex to drive long-term benefits and ROE, unlocking corporate value.
