Slight rebound in Japan equities was in line with global markets. Although the market had a positive year in local terms, the significant depreciation of the Japanese Yen against the Dollar resulted in losses in US$ terms for the year. Over the month of December, the Nikkei 225 was 3.49% higher (1.63% in US$ terms), while the TOPIX also gained 3.32% higher (1.46% in US$ terms).
While COVID cases were still far below their previous peaks, the trend has been upwards, prompting the government to tighten restrictions over borders and local economic activities. If the latest wave of Omicron does manage to gain a foothold in the country, it could spell more restrictions for longer, inevitably impacting the economy. The travel ban in particular is hard on relevant sectors such as travel, retail, and hospitality related, dampening the Japanese economic outlook in the short term.
Overall, outlook of the Japan equity market is affected by 2 aspects. On one hand, the economic fundamentals remain weaker, as suggested by the leading indicators. The headwinds from the renewed COVID crisis also do no favours to the 2022 economic outlook. However, this is still somewhat balanced out by the loose monetary policy, guaranteed by the low inflation which has diverged from the global trend. The dovish monetary policy could also potentially support equity valuation, while the weak local currency due to the widening yield cap could potentially supporting corporate earnings. Considering factors from both sides, we stay neutral on the Japan market for 2022.