In the US, the Fed’s recent messaging has stamped out any hopes of a dovish pivot. Europe also faces further rate rises as the ECB tries to combat inflation. Japan, on the other hand, has shown remarkable resilience to inflation, allowing the BoJ to maintain its dovish stance.
The yen has depreciated, which could support Japanese companies given half of revenues for the MSCI Japan come from outside the country. Valuations for Japanese companies look favourable, despite relative outperformance this year.
Amid Further Hawkishness, Seek Out Regions with Accommodative Policies
US Federal Reserve (Fed) Chair Jerome Powell’s speech, at the Jackson Hole Symposium, swiftly removed any hopes that the Fed will turn dovish in the coming months. As a result, US equity markets quickly reversed the gains that were posted earlier in August. Meanwhile, Europe is awaiting a potential 75bps rate from the ECB. As policymakers’ commitment to fight inflation has dampened market sentiment, we believe investors could seek out regions that are less affected by the challenges related to rising prices and monetary tightening.
Japanese resilience to inflation, in CPI terms, has been remarkable so far this year. Economists expect CPI to average 2.0%,1 which is significantly below the high single digit numbers expected for both Europe and the US. Low inflation allows the Bank of Japan (BoJ) to remain on its dovish course and keep its key rates around 0. This scenario enables companies to access cheap financing and supports equity valuations that, despite relative outperformance this year, remain undemanding with 12-month forward earnings yield at 8.2%.2
The divergence of the BoJ’s approach has led to sharp depreciation of the yen, which trades around a two-decade low against the US dollar. While currency is always a double-edged sword, we continue to expect a weak yen to act as a supportive factor, given nearly 50%3 of revenue for companies within MSCI Japan comes from outside the country. This environment allows businesses using US dollar-denominated contracts to benefit already in the revenue line while global companies, which generate revenue and bear costs in foreign currencies, should see a positive impact upon translating bottom line earnings to weaker yen. The negative effect of a depreciated currency on local demand is mitigated by fiscal spending from a record state budget of JPY 107.6 trillion.
The gradual loosening of COVID restrictions has allowed Japan to benefit further from certain reopening dynamics, particularly in tourism, which may also impact the broader service sector to some extent. And the weak yen certainly makes Japan an interesting destination for tourists and investors alike.
Figure 1: USD/JPY Exchange Rate
Figure 2: MSCI Japan Revenue Split by Region*
A Quality Dividend Approach Could Provide a Buffer Against Volatility in APAC
For investors seeking exposure to Japanese equities, or the wider Asia Pacific region, but who are worried about short-term volatility, a Dividend Aristocrats® approach should be considered. The SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF offers investors the opportunity to play a long Asia Pacific exposure with a higher indicative dividend yield of 4.59% (a 178bps premium to the market benchmark MSCI All Country Asia Pacific Index).4 While the ETF is nearly neutral on Japanese equities overall, the stock selection within Japan tends to lean more defensive, toward sectors such as real estate.
1 Source: Bloomberg Finance L.P., as of 31 August 2022 (Contributor Composite).
2 Source: Bloomberg Finance L.P., as of 31 August 2022.
3 Source: FactSet, as of 31 August 2022. Revenue weighted by market cap of constituents.
4 Source: FactSet, as of 31 August 2022.
Information Classification: General Access.
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For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.F: +49 (0)89-55878-440.
For Investors in Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
For Investors in France: This document does not constitute an offer or request to purchase shares in the Company. Any subscription for shares shall be made in accordance with the terms and conditions specified in the complete Prospectus, the KIID, the addenda as well as the Company Supplements. These documents are available from the Company centralizing correspondent: State Street Banque S.A., Coeur Défense - Tour A - La Défense 4 33e étage 100, Esplanade du Général de Gaulle 92 931 Paris La Défense cedex France or on the French part of the site ssga.com/etfs. The Company is an undertaking for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS in accordance with European Regulations. European Directive no. 2014/91/EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France.The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214-2-2 of the French Monetary and Financial Code.
For Investors in Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. Telephone: +49 (0)89-55878-400. Facsimile: +49 (0)89-55878-440.
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For Investors in Spain: State Street Global Advisors SPDR ETFs Europe I and II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. Before investing, investors may obtain a copy of the Prospectus and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of State Street Global Advisors SPDR ETFs Europe I and II plc from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain or at spdrs.com. The authorised Spanish distributor of State Street Global Advisors SPDR ETFs is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores).
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Information related to Mexico
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