Japanese equity can withstand credit turmoil -- Schroders

Japanese equity markets experienced sharp falls today in response to intensified strains in global financial markets in the wake of the failure or rescue of several US and European financial institutions. Downside risks to the world economy appear to be growing daily and we believe that the Japanese market is being driven by highly negative investor sentiment, rather than fundamental weakness in the underlying companies.

The slowdown has spread from the US to the majority of economies around the world and undoubtedly Japan will be affected, especially as it is an open economy with a large export sector. In the short-term, we also see private sector domestic demand remaining weak, as real income growth is stagnant and capex is being hit by downward pressure on corporate earnings.

However, although not immune from the global cycle, we believe the Japanese economy is now in better shape to withstand turmoil than in previous crises, making us optimistic for a more muted slowdown. In particular, the banking system is relatively unaffected by the credit crunch, having already been through painful deleveraging during the crisis of the 1990s.

Uncertainties are likely to remain significant in the short term as the full extent of the fallout from the global financial crisis is still unclear. But we see many stocks with good fundamentals currently trading on extremely attractive valuations, presenting selective buying opportunities.