Uncertainty permeates markets worldwide. Masatoshi Kikuchi, Pan-Asia Chief Equity Strategist at Mizuho Securities, expressed his outlook on the Japanese stock market for fiscal year 2019 (Apr/2019 – Mar/2020). He noted two key considerations: the consumption tax hike set to go into effect in October and the state of U.S.-China economic relations.

1. Japan's corporate performance appears flat while the global economy seems headed for soft landing


How do you see the Japanese economy performing this year? Where do you focus when trying to get a handle on the economy and stock market in 2019?


Mizuho Securities predicts a 0.6% increase in Japanese GDP for FY 2019 in view of the consumption tax hike in October and the compensatory measures planned by the government. Let's examine the domestic factors closely.

Corporate performance data will be released in April and we anticipate many projections of declining earnings. Already, NTT Docomo has announced a price cut in cellular rates, which may be a hedge to induce negative CPI (consumer price index).

Later, we will celebrate an unusually long Golden Week [holiday-jammed week in late April to early May in Japan] of 10 days off in a row this year. Some expect consumer spending to increase, but the long market closure is worrisome for the stock market. We expect many investors to try to exit their positions in advance of the holiday, which could cause the Nikkei 225 to briefly dip below the 20,000 level in April.

The consumption tax hike is set in October. Although I don't see that causing a recession – in fact, it will barely damage the economy – the tax increase would seem ill-timed while the world is suffering an economic slowdown.

Throughout FY 2019, I see a 2.6% increase, a flat figure, in corporate earnings for companies listed in the TSE First Section. I expect a 9.0% increase in FY 2020, based on a soft landing for the world economy.


How about the world economy in FY 2019?


Regarding the Chinese economy, I see 6% GDP growth without downturns. The Chinese stock market got off to a sluggish start, but it will steady itself in the latter half of the year. I predict only a 2.5% GDP increase in the US economy for 2019. Historically, there has been no recession in the year leading up to a presidential election (which will take place in 2020). Furthermore, the Fed has put a halt to rate hikes. Consequently, I think the US economy is due for a soft landing.

Since both China and the US want to halt any downturn in their economies, I expect they will likely postpone any trade talks or reach some sort of compromise in 2019. Once the markets gain a sense of security in US-China negotiations, we can expect a Goldilocks market.


How do you see China affecting the Japanese economy?


China has shifted from deleveraging to monetary easing in order to absorb damage to its domestic market caused by its fractious relationship with the US. It has lowered its ratio of cash reserves to deposits. But we'll have to wait a while to see the effects clearly. According to OECD leading economic indicators, the Chinese economy is recovering. China's Electronic Commerce Law, which took effect in January, has had some negative effect on Japan's inbound business. Chinese tourists in Japan have been changing their activities from binge shopping to experience-oriented ones. However, I think tourist numbers and spending levels will recover after June.

2. Nikkei 225 will stay in a narrow range until October


What is your outlook for the Japanese economy and stock market in 2019?


My assessment of the Japanese economy in FY 2019 is: real growth rate of 0.6% and the average dollar at 105 yen, moving between 100 and 115 yen. Corporate profits will gain 8-9% while the global economy heads for a soft landing in FY 2020. In FY 2021, I see the economy entering into a recession. The Nikkei 225 will move in a boxed rage of 19,000 to 23,000 until October, and then try to hit 25,000, its highest level since 2018.

We have a risk scenario of recession starting in 2020, earlier than predicted. In our current scenario, the consumption tax hike chills consumer sentiment, the yen becomes stronger – up to 90 yen to the dollar, — and the Nikkei 225 falls to 15,000 where foreign investors keep selling Japanese stocks. If the scenario is worse than that, then we'll have a financial crisis worldwide.

On the other hand, a good scenario would see US monetary easing, IT issues soaring just like in the late 1990s, the 4th industrial revolution gaining steam and giving way to bubble markets worldwide.


Which indexes and events should we be watching in Japan?


I think the OECD leading economic indicator is a good predictor of markets and the world economy. Using those figures, we would like to determine if China's economy is really on the way to recovery.

Regarding events this year, I would say the annual conference of the International Corporate Governance Network (ICGN) to be held in Tokyo in July is important. ICGN, an investor-led organization, was set up to promote effective standards of corporate governance and investor stewardship. Hundreds of foreign institutional investors will meet Japanese managers and IR professionals and visit their companies. I'm very interested in seeing how foreigners change their investment stance toward Japanese stocks. If they recognize advances in Japanese corporate governance, they will buy back their issues.


Masatoshi Kikuchi

Pan-Asia Chief Equity Strategist, Equity Research Dept., Mizuho Securities Co.

Masatoshi Kikuchi joined Daiwa Securities in 1986 after receiving a bachelor’s degree in agricultural economics from the University of Tokyo.  After tenures at Daiwa Institute of Research (4/1986-11/2000) and Merrill Lynch (12/2000-8/2012), he joined Mizuho Securities in September 2012.  He also received a MBA from Cornell University in 1991.  He was ranked No.1 in Institutional Investor’s 2019 strategist ranking and No.1 in Nikkei Veritas’s 2019 strategist ranking.

Kikuchi has published many books include How Significant Are Stock Indices For Investors?, Focus on Foreign Investors’ Investment Strategy, Condition for foreign investors to buy Japanese stocks, Change of Money Flow, Foreign Investors, Stocks Favored by Foreign Investors, M&A Strategy to Strengthen Japanese companies, M&A Strategy Through TOBs and Spin-offs, and The Enterprise Value Valuation Revolution.  His translated works include The Cost of Capitalism and Cost of Capital-Estimation and Applications. 

He is a chartered member of the Securities Analysts Association of Japan as well as a CFA Institute certified securities analyst.