Further yen weakness and Nikkei strength ahead

Japanese equities are among the most vulnerable to the fall-out from a potential US government default. What’s more, profit margins are already close to record highs, and the pass-through of earlier yen weakness is largely over. Nonetheless, there are a number of reasons why corporate profitability should remain elevated, and equity valuations are still not too demanding. Renewed outperformance of the Japanese stock market thus seems likely once the US crisis is resolved, given the prospect of further yen weakness and some favourable policy developments at home.