THE performance of Japan's biggest shares is falling further behind its US counterparts and its once-vaunted manufacturing sector may be to blame.
The Nikkei 225 Stock Average is now trading at a six-year relative low against the Dow Jones Industrial Average. The divergence hints at a structural challenge for Japan Inc - an over-reliance on manufacturing - and the underperformance could grow, market participants say.
"A good proportion of the Nikkei 225 is dominated by existing manufacturers and as you can see from Toyota's results, we're not in a situation where the company is going to see big earnings growth," said Ikuo Mitsui, a fund manager at Aizawa Securities Co in Tokyo.
In the US, "top heavyweights like Microsoft and Apple have businesses with good potential for growth like IT and cloud services. The performance gap could grow".
Japan's blue-chip gauge is filled with industrial giants including Tokyo Electron Ltd, TDK Corp and Toyota Motor Corp - which recently warned on profits - whereas the US benchmark's gains have been propelled by software and service providers like Microsoft Corp and Apple Inc.
While global stocks have rallied this year, thanks to a dovish pivot from a number of central banks and optimism over US-China trade talks, Japanese shares have continued to underperform their American peers. The Nikkei has risen about 4 per cent, compared to a more than 9 per cent jump in the Dow Jones Industrial Average.
A potential contraction in investments and growth in China in the wake of the trade spat pose a headwind for Japanese equities, according to Masayuki Doshida, a senior market analyst at Rakuten Economic Research Institute. More fundamentally, Japan's reliance on manufacturing is also a hurdle, he warned.
"We have a lot of suppliers to Apple, but Apple is trying to boost profits through services rather than counting on iPhone shipments," Mr Doshida said. "The benefit Japanese companies had as suppliers could diminish." BLOOMBERG