With Japan at an inflection point driven by corporate reform and the expectations of the new Bank of Japan Governor Kazuo Ueda’s approach to monetary policy, at Japan House in London M&G Investments discussed the investment opportunities there and the outlook.

Experts at M&G Investments believe that Japan is an exciting market and they are optimistic about the outlook in 2023. 

“Earnings per share have increased at a compound rate of 10 per cent in Japan. That’s incredible. Japanese equities have never grown earnings at 10 per cent compound for a 10-year period and they just did that,” Carl Vine, co-head of Asia Pacific equity team, said recently at a media event.

“Is it sustainable?” he questioned. “We didn’t have booming GDP growth in the last 10 years. It was pretty mediocre, yet they still managed to drive out this incredible earnings growth. I think they can do it again even if economic growth is mediocre like it was in the last 10 years. I think the same drivers from the past 10 years that drove growth will do it again,” he said.

“When I look forward 10 years, I do think this change in the nature of corporate behaviour hasn’t stopped. It’s really accelerating,” he continued. “The institutional framework that firms operate in have evolved tremendously. I think the current environment is more inducive to earnings growth in the next 10 years than it was in last decade,” he added.

M&G isn't alone in smiling on Japan and thinking that, as a result of corporate governance reforms and other measures, the Asian country deserves more investor attention. (See stories here and here.)

Vine looked at how high earnings growth over a long period can be obtained from a low growth economy. “Demographics in Japan definitely work against long-term economic growth. Japanese labour productivity is very low from a global perspective. If Japanese labour productivity was the same as the US, Japanese GDP would be 40 per cent higher,” he said. 

“I see an equity market that looks cheap. We are stock pickers and look for opportunities. It’s important to be selective and pick the right firms. The change in corporate governance has also had a positive impact. Japanese firms are always quite balanced but they are not always good at disclosing this. We’ve seen a huge shift towards sustainability in recent years and governance has been improving in the country,” Vine continued. 

M&G’s Fabiana Fedeli, CIO of equities, multi asset and sustainability, who spent over six years in the country, added: “The government published the stewardship code in 2015 and the effects are now starting to be felt. The reopening of China’s economy after its zero Covid policy will also have a positive impact on Asia, as a whole.” 

“There are still productivity problems in the country, but that is improving, with increasing levels of automation. Working practices are becoming more up to date. Government policies are also helping women to be more active in the workplace,” she said.     

Towards the end of December, the firm said that the Bank of Japan also surprised markets by making an unexpected change to its monetary policy. It widened the band that 10-year bond yields can fluctuate versus its target of zero. This communicates the BoJ’s pivot towards monitory normalisation. While the Japanese stock market fell in local currency terms, the appreciation of the yen enhanced returns for overseas investors, the firm continued.

M&G Japan Fund
The fund, which Vine manages aims to provide a combination of capital growth and income to deliver a return, net of the Ongoing Charge Figure, that is higher than that of the MSCI Japan Index over any five-year period. 

At least 80 per cent of the fund is invested in the shares of companies that are based, or do most of their business, in Japan. It is a concentrated portfolio of fewer than 50 holdings. The fund manager invests in companies whose shares are deemed to be undervalued because investors do not always assess investments rationally. 

The fund performed broadly in line with its benchmark in December and has outperformed in 2022, the firm said in a statement. Stock picking added value in December, with key contributors' being new addition Skymark Airlines, Mitsubishi UFJ and Kawasaki Heavy Industries, the firm added. Skymark is a local airline which listed in December and is attractively valued in the firm's view. MUFJ, like other banks, was a beneficiary of the BoJ move. Conversely, key detractors included Nikon Corp, Socionext and Mitsui Fudosan. During April, they also took profits in Nintendo and began positions in Oriental Land and Skymark Airlines.