The Olympic games may be going ahead, but they seem unlikely to deliver the anticipated boost for the Japanese economy. A lack of spectators has deterred valuable sponsors and there will be no tourism boom as the crowds stay away.

The Japanese economy was struggling anyway. It has vast structural problems – ageing demographics, high debt, a sclerotic corporate culture. Japanese economy shrank 4.8% in 2020, in line with a rate of 4.7% among advanced economies, but is only expected to bounce back by 3.3% this year, significantly lagging the 5.1% expected from its developed market peers.

This may partly explain the recent lacklustre performance of its stock market. Over the last six months, the average Japan fund is down 2.0%, notably worse than the UK, US or European sectors. It could be argued that Japanese equities are simply moving in line with their wider Asian peers. However, Japanese equities didn’t keep pace with Asian equities strong performance in 2020. It seems that Japanese investors have had the bad without any of the good.

The difficulties associated with the Olympics have done little to encourage international investors back to Japan. There appears little compelling reason to allocate more to Japanese equities: no boost from the Olympics, no economic revival from the reopening trade and a sluggish vaccination programme. In the meantime, corporate reform proceeds at a glacial pace.

However, before investors overlook Japan completely, there are still some gems among its corporate sector. Arguably, it still leads the way in areas such as robotics, healthcare innovation and certain electrical goods. There are some parts of the technology complex that simply aren’t available anywhere else, particularly in hardware products.

There has been a sense that Japan is falling behind on the digital revolution, denting its long-term productivity, but it has the scope and ability to catch up. This could be significant for Japan’s economic and corporate landscape, helping creating a more productive workforce and promote economic growth.

Equally, after a grim period for Japanese equities, valuations look relatively cheap compared to the rest of the world. If Japanese companies deliver good earnings as the world recovers, there is scope for a meaningful bounceback in share prices.

Japan is always a problematic area for investors. That said, today, it does look unfairly left behind. The Olympics may not have delivered as expected, but there are still some hidden gems in its corporate sector.

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This article was sourced from Adviser-Hub.co.uk.