There is such a mixed bag of factors to weigh up that the answer is far from obvious. You can make a strong case either way. While Japanese equities fund managers seem sure recent good times are set to continue, other interested observers tend not to be so sure.
Major factors in favour of the sunny scenario include the scale of the quantitative easing programme under way, the cash stock piles most of Japan’s corporations already have available to invest if they wish to, and important economic reforms being enacted.
On the negative side of the equation, there are a couple of deep-rooted issues which potentially could hold the country and its equities market back for decades to come. Namely, a continued reluctance to spend among consumers and an aging, declining population.
Japan's population fell by a record 268,000 people in 2014, a reflection the extremely low birth rate coming home to roost.
There is also the fact that a significant tailwind has been provided during the first quarter in the form of newly cheap oil, which if taken away could nip the rally in the bud.
Head of equities for Japan at Fidelity Worldwide Investment Alex Treves sees the ‘micro-level’ reforms as the key.
“The market appears to have underestimated the progress on one of the strands of Prime Minister Abe’s growth strategy – corporate governance reforms,” he said. “Japanese companies are actively responding to calls for better governance. We are seeing signs of positive evolution in capital management as companies utilise excess cash for dividends and share buybacks and increase returns on equity.
Treves also expects a new governance code that takes effect on 1 June 2015 to encourage further improvements in shareholder value. “More than ever, there are signs of a broad-based commitment to reforms, and with returns going up, we can expect valuations to rise over the medium term,” he said.
This bullish outlook is tempered slight by Treves’ acknowledgment of ‘external risks’ such as a cyclical downturn in US activity, the deflationary threat in the Eurozone, and a ‘hard landing scenario’ in China which could prompt profit taking on Japanese equities in the short term.
A research note produced by Numis offers a positive assessment. The firm said there are ‘encouraging catalysts’ for Japanese equities both in terms of internal reforms and macro-economic developments.
Numis takes particular note of the QE-generated depreciation in the Yen, which makes exports more competitive, and the ‘positive developments in corporate governance’ in the country over the past 18 months.
On balance the optimistic argument looks stronger, but not by much. The short and medium term may well see share prices continue to rise but the unfavourable demographics and the possibility of oil prices spiking back up will be lurking in background.