New ways of thinking for today's markets

Japan's renaissance meets restructuring challenge

In 2013, economic recovery outside the United States was not limited to Europe. The conventional wisdom with respect to Japan, for example, seems to be that "Japan is back." With the MSCI Japan Index registering a 55% gain in 2013 in local-currency terms — and the closest countries tracked by MSCI at 45% (Greece) and 40% (Finland) — the market clearly found reasons to cheer Japan's rise from its multi-decade deflationary spiral.

Structural hurdles
The Bank of Japan's extremely loose monetary policy has the potential to drive up asset prices even further. But the Japanese government may find it challenging to implement the requisite structural adjustments that the economy needs while simultaneously addressing the nation's overextended fiscal position. Japanese structural reform includes a list of challenging agenda items, such as raising the consumption tax, making changes to employment laws, forging a transpacific trade pact, and reforming key domestic industries. Markets are not yet giving credit for progress on these issues, so to the extent the administration of Prime Minister Shinzo Abe delivers on its ambitions, markets are likely to respond positively.

Demographic trends pose risk
Japan's economic situation will eventually appear beset by demographics. "Japan faces a demographic ticking time bomb," says Putnam portfolio manager Jeffrey Sacknowitz, "with the workforce likely to decline by nearly one percent per year over the next 10 years and with the overall population aging at an unprecedented pace." Hence, there may be reason to remain cautious about Japanese equities longer term, although in the short to medium term the policy mix should be supportive of stocks.

A positive view on Japanese equities in 2014
"On balance, we see attractive investment opportunities in Japan in 2014," says Putnam portfolio manager Sam Davis. "Part of our view is based on our belief that the yen is likely to weaken further due to the Bank of Japan's continued efforts to expand its balance sheet." When coupled with the potential upside from Japanese structural reform, rising wage inflation, and improved domestic consumption, the outlook for stocks displays attractive upside potential.

Earnings growth in Japan could also be strong in a global context in 2014, and may be led by export-focused companies. Consequently, another tailwind for the Japanese economy may arise to the extent that there is economic improvement in those countries and regions to which Japan exports its goods.

The views and opinions expressed are those of the speakers cited, are subject to change with market conditions, and are not meant as investment advice. All funds and investment products involve risk, and you can lose money. See the prospectus for details. Any economic and performance information is historical and not indicative of future results.






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