Japan got caught in the tech selloff. Now it's time to buy the dip, says strategist.

By Jamie Chisholm

A man walks next to an electronic quotation board displaying the Nikkei 225 stock prices on the Tokyo Stock Exchange in Tokyo.

It's time to buy the dip in Japanese stocks.

That's the straightforward conclusion from London-based research boutique Longview Economics, who in a note published Wednesday lay out the cyclical, fundamental and technical rationale for their bullish call.

Japan's Nikkei 225 equity index JP:NIK sits 8.4% down from its record closing high registered on June 25, after many of its big technology stocks, such as the high-flying memory chipmaker Kioxia (JP:285A), suffered sharp pullbacks as the AI narrative soured.

Harry Colvin, Longview's senior market strategist, believes it's gone too far.

"As a general rule, equity markets are attractive when they: (i) are technically oversold; (ii) have strong upward earnings momentum; and (iii) are cheap, or have recently de-rated," he says.

Such moments, he adds, typically offer compelling buying opportunities, especially when recession risk is low and financial conditions are loose.

"Japan currently ticks all three of those boxes," says Colvin.

Earnings growth for the Japanese market is rapid, some 19% year-on-year in dollar terms, Colvin notes. Meanwhile, the forward price to earnings has de-rated in the past six months, and is cheap relative to its own history.

Source: Longview Economics.

In addition to the cheaper valuation and technical supports are some economic tailwinds.

First, Japan's manufacturing cycle is turning up. The manufacturing purchasing managers' index released last Friday, rose to 55.1 (close to 'max' levels since Longview's records started in 2004), while the new orders index made an 8.5-year high.

Much of that strength reflects stronger capex, linked to semiconductor and electronics sectors, according to Colvin, as overseas demand for such Japanese products rise to multi-year high levels.

In addition, Japanese machine tool orders are growing rapidly ( up 50.4% year-on-year), alongside the re-acceleration in America's industrial cycle.

"In other words, Japan remains closely linked to (a key play on) global growth momentum. The weaker yen, in that respect, is providing an additional tailwind, by boosting exporters' competitiveness and amplifying the upswing," says Colvin.

A second economic support is that Japan's labor market is stabilizing "and potentially starting to strengthen," he says. Most job growth in recent years has come in sectors reflecting Japan's ageing demographic, such as healthcare, medical and welfare.

"On the latest data, though, employment in 'cyclically sensitive' industries has picked up. Combined employment in manufacturing and construction jobs, for example, grew at 2.5% Y-o-Y in June, its fastest pace since 2014," says Colvin.

Source: Longview Economics

The economic improvements are shown in a recent sharp move higher in Japan's leading indicators index.

After taking all these factors into account, Longview says they remain overweight Japanese equities in their strategic portfolio. "While Japan faces a number of structural headwinds, the case for an ongoing cyclical reacceleration continues to build," they conclude in their note boldly titled "Japanese Equities: BUY The Dip."

-Jamie Chisholm

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