Three reasons to be positive on Japan

According to our analysis, Japanese stocks are undervalued in comparison to their global counterparts. Japan is home to many successful companies, which because they are listed in Tokyo, trade on more modest valuations than similar companies listed on other markets. The recent setback to the economy could provide an opportunity to top-up Japanese investments at a depressed price.

Here are three reasons for investors in Japan to be positive:

1. Economics

Japan's ongoing quantitative easing programme aims to assist the economy in meeting the government's 2% inflation target. Additional stimulus was recently announced which could result in higher equity and bond prices, as demand from the National Pension and the Bank of Japan increases.

2. Oil

The falling price of oil will reduce Japan's import bill. For most companies a lower oil price is positive as it should feed through to lower raw material and transport costs, thus boosting profitability. It could also reverse some of the effect of the increase to consumption tax by increasing the population's disposable income. Conversely, it could act as a headwind to the government's inflation target.

3. Currency

The yen has weakened against the US dollar to a new five-year low, falling more than 7% since the increased stimulus measures were announced at the end of October. The devaluing of the yen should provide a boost to earnings and competitiveness in Japan's export sector, but makes imports more expensive. The weakening of the yen has had a negative impact on sterling investors - the Japanese stock market has delivered growth of 92% over the past three years in yen terms, but when these profits are converted to sterling, this reduces to 26%.

Yen/US dollar exchange rate

Source: Proquote International 1 December 2014

Past performance is not a guide to future rates.