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While Japan struggles with a third wave of infections, foreign investors are predicted to pile back into the country’s stocks in 2021 as the Olympics (if they happen), the RCEP trade pact and an expected rise in U.S. corporate taxes, among other factors, make Japan an attractive place to invest again.

As the government seeks to steal some of Hong Kong’s thunder as a regional finance hub amid China’s crackdown on the former British territory, the Financial Services Agency has just opened an office in Tokyo to help foreign financial firms settle in, with all services available in English.

But foreign investors should be aware they are entering a “new normal” stock market — one where the Bank of Japan is now the biggest player, thanks to its purchases to support the virus-hit economy, closely followed by the government pension fund. The dominant presence of these two public entities has raised concerns about their influence on market prices.

The Financial Services Agency has launched an office to help foreign financial firms with all the regulatory processes needed to enter Japan in English. | BLOOMBERG
The Financial Services Agency has launched an office to help foreign financial firms with all the regulatory processes needed to enter Japan in English. | BLOOMBERG

Speaking of prices, while the BOJ has been concentrating on keeping the market buoyant, its target of achieving a 2% inflation rate looks further away than ever, with consumer prices sliding at the fastest pace in 10 years last month.

At the same time, Wall Street and Japan’s largest banks are both expecting the yen to break the barrier of ¥100 to the dollar this year, and perhaps push to ¥98. The yen at ¥100 to the dollar is a tough call for Japan’s banks, mainly because it’s the point where domestic exporters start losing money, although it’s great for those traveling overseas — provided that’s possible again.

Finally, Japanese dealmaking was resurgent in the second half of 2020, and the momentum is likely to continue into 2021, M&A advisers say, with a pipeline of already agreed deals still to be announced. Pent-up demand, towering cash piles and external forces could make 2021 among the most active years yet.

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