The Japanese market is set for a "barnstormer of a year" in 2020 due to an improved global trade outlook and the upcoming Olympic and Paralympic Games in Tokyo, analysts have suggested.
With the U.S. and China set to sign a phase one trade deal in Washington on January 15 and the world's greatest sporting spectacle kicking off in the summer, Japanese strategists believe the country is well placed to capitalize.
"You are looking at a market that is really a geared play on global trade, and the chances are that global trade will be rebounding after the pressures it had from Sino-U.S. tensions last year," Nicholas Smith, Japan strategist at CLSA, told CNBC's "Capital Connection" on Monday. He added that Japanese markets are "absolutely dirt cheap" at present.
Speculation is abound that Japanese Prime Minister Shinzo Abe will dissolve the House of Representatives for a general election this year, while Bank of Japan Governor Haruhiko Kuroda has suggested that the central bank is closely monitoring the recent escalation of tensions between the U.S. and Iran.
Smith suggested that the combination of circumstances could render the government more amenable to fiscal spending in 2020.
"Japan, at the end of last year, had a consumption tax hike — it's starting to bite its nails about that, but with the likelihood that this is going to be an election year here in Japan, I think that the government will absolutely open the spigot on fiscal spending," he told CNBC.
"After all, the cost of money is slightly less than money at the moment, so the government has already signaled that they are prepared to spend, say, 2% of GDP (gross domestic product) on really juicing the market."
Olympic gold
Smith suggested that a sharp incline in Japanese inbound tourism in recent years due in part to visa reforms indicates that Japan is likely to capitalize on the Tokyo Olympics in the same way the U.K. did during the London Olympics.
In a note published Monday, Naoya Oshikubo, senior economist at Sumitomo Mitsui Trust Asset Management (SMTAM), projected that the Japanese economy would grow moderately at an annualized 0.1% in 2020, but the Olympic and Paralympic Games will provide an economic boost of around 32 trillion yen ($300 billion) due to increases in inbound and domestic tourist consumption.
"Among the sectors which are due to benefit from this global sporting event are manufacturing, in particular companies producing electrical equipment such as TVs, as well as the leisure sector with companies in the fitness business (i.e. gyms), dining services and hotels expected to reap great rewards," Oshikubo said.
"Specifically, we like Sony, which has a large share of the 4K TV market; NEC, whose facial recognition system will be used at the Olympic Games as part of the security measures; Konami, which operates fitness clubs; and HUB, one of the most popular chains of British pubs in Japan."
With the current market valuation at around 13 times earnings, Oshikubo highlighted that the Japanese equity market remains attractive on a price-to-earnings ratio basis — an important metric used by traders to gauge the value of a stock or index.
Although still beholden to external geopolitical events, SMTAM believes that valuations in the Japanese equity market will rise in 2020 on the back of a predicted 10.7% growth in corporate earnings for the fiscal year of 2020, compared to -7.9% in 2019.
SMTAM has predicted that the Nikkei 225 could reach 27,000 points and the TOPIX 1,900 points by the end of 2020, with the potential to go higher in the event of further U.S.-China trade war easing.
"The stock market will also benefit from the Olympic Games as historic data shows that markets of countries hosting the games tend to rise and that any risk factors are already priced in as well as governments' countermeasures," Oshikubo added.
"In fact, since the 1984 Los Angeles Olympics, every host nation has seen higher share prices at the end of the year following the Games compared to the year preceding. Japan should be no exception."
Disclosure: Naoya Oshikubo himself does not hold positions in Sony, NEC, Konami or HUB. SMTAM invests in all four names within its passive strategies as the stocks are included in the relevant benchmarks. SMTAM also holds Sony in one of its active management strategies.