Is Suga’s resignation another false start for Japanese equities? Is Suga’s resignation another false start for Japanese equities? Is Suga’s resignation another false start for Japanese equities?

Is Suga’s resignation another false start for Japanese equities?

Equities 10 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  Japanese equities are rallying the past two weeks fueled by Prime Minister Suga's resignation and hopes of his pro-business party LDP to get re-elected in the upcoming general election. Japan has undergone several market reforms lifting women's labour participation rate and increased immigration, but Japan must do more if Japanese equities are to outperform global equities. The return on equity remains too low burdened by the Keiretsu system and without higher return on capital we do not see an end to Japan's underperformance.

Nikkei 225 futures are up 12.2% in only 11 trading sessions with the latest push higher coming on the back of Prime Minister Yoshihide Suga’s unexpected resignation. The market is cheering on the news as Suga was criticized for his handling of the pandemic and seen as an obstacle for the LDP (Liberal Democratic Party) to win the general election scheduled to be held on or before 28 November 2021. Especially, the current vaccine minister Taro Kono is seen as a market reformer and someone that could extend the market reforms of the Japanese society which started back in 2012 under former Prime Minister Shinzō Abe which has extended the women labour participation rate from 41.9% in 2012 to 44.3% in 2019. During the years of the Abe government, Japan loosened its immigration policy leading to years of subsequent net positive immigration offsetting some of the economic growth pressures coming from negative natural change in the population (births minus deaths).

Source: Saxo Group

The Japanese rollercoaster

With Suga gone and Japanese equities rallying it worth asking the question whether this is the start of a longer period of Japanese equity outperformance or just another false start. But before we go into details of the Japanese equity we must first outline the historical performance. From January 1970 to November 1988, Japanese equities enjoyed a spectacular rally outperforming the MSCI World Index by 10.6% annualized. But as the world thought Japan was about to conquer everyone with their efficient model it all crumbled and catapulted Japan into deflationary swirl that has been difficult to escape ever since. By late 1998 the implosion of Japanese equities had run its course underperforming the MSCI World by 80% throwing out most of its relative gains made during the 1970-1988 period.

From 1998 to 2008, Japanese equities waxed and waned against the MSCI World and proved to suddenly becoming a relative safe-haven during the Great Financial Crisis due to the strong JPY. Since December 2008, Japanese started its second secular decline relative to global equities losing 46% or 4.8% annualized. During this period of 13 years the initial period after Abe was elected new Prime Minister in 2012 saw a brief period of excitement over Japanese equities and growth with MSCI Japan outperforming the MSCI World by 14% in only six months. But the magic disappeared and investors turned to US growth and technology companies showing consistently high growth rates and a new profitability profile of the new digital age.

Source: Bloomberg

As the relative performance chart shows, Japanese equities have had many false starts and the late 2012 to early 2013 period under the Abenomics introduction was the latest period of excitement. The question is now whether Japanese equities could turn the tide and enjoy the love of investors.

Japanese equities are historically cheap

The MSCI Japan has almost recouped its lost earnings per share (EPS) over the past years since it peaked out in Q1 2018. In Q2 2021, EPS was almost back to the peak and we expect Q3 to show a new all-time for EPS, and this is also the main reason why Nikkei 225 futures have almost doubled from the lows in 2020.

While EPS has grown 14.7% annualized since 2011 the global investor has not been impressed pushing the valuation of Japanese equities lower. Today, the MSCI Japan Index is valued at 9.1x on EV/EBITDA compared to 15.1x for the MSCI World. This spread is a staggering 40.1% discount, a record low since 1995, showing that investors have not been this pessimistic on Japanese equities in almost three decades. How can investors be so pessimistic?

The ROE problem

Shareholders in Japanese companies have for many years suffered under the Keiretsu system which is a system that creates immense stability and high degree of employment and was instrumental in Japan’s growth miracle after WWII. But the Keiretsu is also an obstacle for innovation and concentrates wealth and power among a few mega conglomerates. This has led to Japan losing out to the US across many technologies such as cyber security, software application, social media, semiconductors, and biotechnology.

The problem is crystalised when we look at the return on equity (ROE) among Japanese companies which is currently at 9% and peaked in November 2018 at 10.7%. The average return on equity since 1995 has been 5.2% which is significantly below the cost of equity and thus the main driver of lower relative total return to the MSCI World and US equities. For comparison the Nasdaq 100 companies are currently operating at 26.9% ROE and S&P 500 has a ROE of 17.2% significantly above Japanese companies. As long as this difference persists then Japanese equities will continue to underperform US equities and the MSCI World. A valuation repricing of Japanese can temporarily create outperformance but long-lasting outperformance requires a higher ROE which requires profound reforms of the Japanese corporate culture.

Our view remains that the best the Japanese equity market can deliver to global investors is its wide-ranging companies within robotics and automation, which also happens to be our next equity theme basket.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (
- Full disclaimer (

Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.