The Case For Japanese Small Caps In 2023

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Investors and companies ventured into uncharted territory following the start of the Covid crisis in early 2020, with challenging market conditions turning perceived tailwinds into headwinds and vice versa. In 2022, the fragile path to recovery was further destabilised by Russia’s invasion of Ukraine, which brought volatility back to equity markets, including Japanese equities.

As the inflation rate in Japan rose to levels not seen since the early 1980s, the Bank of Japan was forced to adjust its policy.

The large multiple corrections that started at the end of 2021 disproportionately affected the innovative growth segment of the Japanese market, whose valuation premium compared with markets generally had continued to decrease steadily over the year. This led to the pendulum swinging between small-cap growth and large-cap value.