Trade Idea - Japan

The great escape from the lost decades.

Most economists remain confident about continued global growth throughout 2025.

“That being said, with growth expectations already elevated in the US, the current valuations are leaving them more vulnerable to any disappointments.”

Here is for example Goldman’s return forecast for all regions for 2025.

As you can see, Japan is top pick!

“The highest return forecasts we have is in Japan at +17%, driven by EPS growth, together with the tailwind of a weak yen.”

“Sustained reflation and rising productivity at the macro level – working in combination with improved corporate governance at the micro level – will likely drive further improvement in corporate profitability in Japan.”

Investment Thesis

Japan is showing a strong domestic demand driven GDP growth, in sharp contrast with the lost decades of the 90’s and 00’s.

Also, Japan is an excellent geographical diversification in any portfolio. It has low tariff risks and low valuations. (See below)

What about US tariffs?

Most economists expect very limited impacts of US tariffs on Japan's GDP.

Japan’s exports constitute 22-23% of its GDP, and exports to the US are about 20% of the exports. If Japan’s real exports to the US drop by 9%, this works out to a 0.3-0.4ppt setback in Japanese GDP using a simple calculation.

However, taking into account substitution effects from China and other countries, this study shows even a positive effect.

Fundamental Analysis

Japan’s stock market valuation is cheap compared to the US with a forward P/E at 14.6 compared to the 22.7 for the US.

How to play the Trade

We advise to invest thematically in Japan via a low-cost ETF, the Amundi MSCI Japan ETF.

Risks to take into account

• A weakening of the Yen versus EUR

• Alternatively, a EUR-hedged ETF can also be bought, albeit at a slightly higher cost.

Time Horizon and Target Price

These are notoriously difficult to pinpoint, considering current economic and geopolitical extreme uncertainties. But from a risk-reward analysis, Japan is an interesting diversification in any portfolio.

Conclusion

Given high valuations and unusually high concentration in US equity markets, we focus on geographical diversification to improve our risk-reward in the portfolios.

Japan is a thematic investment that fits any portfolio in the current geopolitical environment.