Japan equities perform steadily in April

The Japanese equity market performed steadily in April amid signs that new COVID-19 cases in the US and Europe were slowing, with the TOPIX (w/dividends) rising 4.35% on-month and the Nikkei 225 (w/dividends) climbing 6.75%. Japanese stocks saw some periods of weakness during the month as oil prices plunged amid the economic downturn caused by the COVID-19 pandemic, which led to greater uncertainty over the global energy industry. Nevertheless, stocks were ultimately boosted by growing views in the market that the pace of new infections had slowed in the US and Europe, the Japanese government’s historic emergency stimulus package, and expectations for a US economic recovery as the country prepares to reopen. Of the 33 Tokyo Stock Exchange sectors, 27 sectors rose, including Mining, Marine Transportation and Services, while six including Air Transportation, Electric Power & Gas and Pulp & Paper declined.

Exhibit 1: Major Indices (Last Month and Historic Changes)

Exhibit 1: Major Indices (Last Month and Historic Changes)

Source: Bloomberg, as of 30 April 2020

Exhibit 2: Nikkei 225

Exhibit 2: Nikkei 225

Source: Bloomberg, as of 30 April 2020

BOJ’s main focus on the pandemic, not deflation

The coronavirus epidemic has depressed consumer activity, pushing down prices across a range of countries, including Japan. Consumption in Japan had already been hit by last year’s VAT hike and the epidemic has exacerbated concerns that the economy could slip back into deflation. Emergency measures imposed by the Japanese government in the wake of the pandemic have restricted the movement of people, curbing consumption and weighing on prices. Consumption in Japan could remain weak even after the government lifts its emergency measures, because uncertainty over future income is likely to remain among a significant portion of wage earners in the medium term.

We expect the Bank of Japan (BOJ), for its part, to prioritise policies that address the economic fallout of the pandemic over measures aimed at countering deflationary pressures. Presently, the central bank is focusing on preventing liquidity from drying up in the wake of the outbreak. The BOJ has taken on the role as the market’s main risk taker, supporting the refinancing efforts of corporations acquiring funds by acquiring the bonds and commercial paper they issue. Another key role for the BOJ is to meet the funding needs of financial institutions during the crisis through quantitative easing. Keeping the banking system stable is the BOJ’s top priority at the moment.

Supply shocks and the notion of stagflation

While deflation is a concern to many, some see a potential economic threat on the other end of the spectrum. The epidemic has recently disrupted domestic supply chains. Toilet paper, to take one example, disappeared from store shelves as desperate shoppers rushed to buy the item. Such a supply shock, coupled with an expected economic stagnation, has led some to ponder the possibility of stagflation in Japan.

We note, however, that the recent supply shock was not due to actual shortages. Rather, it was a result of distribution networks being overwhelmed by exploding demand. We believe that the possibility of stagflation is limited. Some basic necessities could be hit by supply shocks during the crisis. But despite the resulting rise in prices, consumers will continue to purchase necessities by cutting back on areas such as travel and leisure, and the overall demand balance is likely to be maintained. The current situation differs from oil shock-induced stagflation in the 1970s, when households could not perform such balancing acts. Back then, households used their discretionary spending almost entirely on necessities, which rose across the board because of their correlation to oil prices.

Exhibit 3: Major Market Indices

TOPIX
TOPIX

JGB Yield
JGB Yield

USD/JPY
USD/JPY

Japan Equity Net Purchase from Overseas (JPY billions)
Japan Equity Net Purchase from Overseas (JPY billions)

Source: Bloomberg, as of 30 April 2020

Exhibit 4: Major Index Performance, Indicators, and Valuation

Exhibit 4: Major Index Performance, Indicators, and Valuation

Source: Bloomberg, as of 30 April 2020
(e) stands for consensus estimates by Bloomberg.
Turnover and market cap in JPY trillions.
Net Purchase (JPY billions) from overseas is cumulative monthly.