Investment Strategies
OPINION OF THE WEEK: At Last, It Seems Japan Is Winning Investment Fans

In my weekly column I briefly reflect on how much talk there is nowadays about Japan and its improved market performance.
While the news agenda can be all too easily dominated by the
shenanigans at firms, such as the recent UK “de-banking” fiasco,
it’s a relief to focus on trends that don’t tend to show up under
bright lights. One trend worth attention is the Japanese economic
recovery and the performance of its stock market this year.
As explained in a number of articles on our newswires (see
examples here,
here
and here),
Japan appears to be emerging, at last, from decades of stagnant
growth, weak share price performance, and a set of “false
dawns". The country’s real estate and equity market crashed
in the late 1980s and, in spite of a number of fiscal and
monetary policy changes, it never managed to get out of its
slumber. Add to that an ageing population (the country’s
fertility rate is just 1.26), with a relatively tight immigration
policy, the underlying picture looked poor.
But a series of corporate governance reforms which, in a
nutshell, make it easier for shareholders to fire underperforming
managers and force them to unlock oodles of cash on their balance
sheets, has changed the narrative. When I speak to fund
managers, they talk about how the stock market, for example, has
far more upside. And, unlike a number of other countries
wrestling with inflation, rising prices are – to a degree anyway
– positive news for a country that was beset with deflation for
the best part of 25 years. The chart below shows that Japanese
equity returns have been strong, although the yen has somewhat
dragged on performance.
Source: Schroders
A sign of how the mood has changed came from a report a few days
ago from Cerulli Associates, the Boston-based analytics and
research firm. It showed that European funds have poured
billions into Japan. PRs regularly invite me to lunches,
breakfasts and dinners (the life of a financial journalist has
its upside) to hear about the wonders of Japan’s stock market. In
fact I get the distinct impression that wealth managers are
scrambling to get on board the “Japan story” before the best
valuations have gone. There’s definitely a “fear of missing out”
(FOMO) at work here.
Of course, we’ve seen parts of this movie before. And the fear
that this revival could be short-lived is, ironically, still a
factor gives some investors and fund buyers pause. But it is hard
to ignore the drumbeat. For example, over at Schroders, the UK
wealth manager, it noted that in late June Japanese
shares were “flourishing” and in May, the major equity indices,
the Topix and the Nikkei 225, both hit their highest levels since
1989. The firm explains the main reasons: “One is a cyclical
aspect, with the Japanese economy being relatively late to reopen
after the Covid-19 pandemic. This gives confidence in corporate
earnings growth this year, alongside attractive valuations as a
whole for the Japanese stock market.
“Secondly, and this is more important as a structural development
for the long term, the trigger was the Tokyo Stock Exchange's
(TSE) call earlier this year for companies to focus on
achieving sustainable growth and enhancing corporate value. This
call was particularly directed at companies with a price-to-book
ratio of below one,” the firm said.
Schroders, in particular, zeroed in on a metric that explains
some of what is going on: the price-to-book ratio. The ratio
compares a company's stock price with its book value per share.
The book value per share represents the company's assets minus
its liabilities, divided by the number of outstanding shares.
“There are a lot of companies listed in Japan with P/B ratios
below one. That means there are lots of companies with the
potential to be revalued more highly – if they can convince
investors that they should be,” the firm said in its note. And
there are ways of raising that ratio, such as pushing
forward research and development and investing in human capital,
thereby boosting growth; they can also boost shareholder returns
by buying back stock or hiking dividends. And there are signs,
Schroders said, that Japanese firms are taking the hint. The
percentage of companies that are “net cash” (i.e. whose cash on
the balance sheet is greater than their liabilities) is 50 per
cent. That gives those companies scope to invest in their
business, or increase returns to shareholders, or perhaps
both.
Of course, it is important not to get carried away. If the
Japanese yen weakens, for example, it means that non-yen
investors who gain from a rally in stocks get hit on the forex
effect. Japan is not an easy country to invest in if one strays
outside the field of the big caps – many of its companies aren’t
tracked by analysts, although the very fact of the market’s
revival might change that.
But there are reasons to be more optimistic. Anyone who can speak
fluent Japanese and understand stock market investing is in an
interesting position. Japan earns a lot from Chinese markets and
the re-opening of mainland China after the pandemic is a positive
development. Also, given interruptions to supply chains and US
trade tensions with Beijing, there's a natural desire for
alternative sources of supply, and Japan is an obvious candidate,
along with India.
I am just about old enough to remember the mid-1980s and the
tremendous success and vigour of Japan’s economy. (Suddenly,
Hollywood movies had a lot of themes about Japan.) Japan’s
manufacturing sector, for example, was the toast of the (often
resentful) West. Its brands were household names. People such as
Soichiro Honda, for example, were equivalent to the Rockefellers,
Musks or Carnegies of the West. Qualities such as precision,
attention to detail, as well as prowess in fields such as
robotics, count for a lot – and Japan has these qualities. With
AI all the rage, the country is surely in a good position to tap
into that as well.
All the usual caveats and health warnings apply – I am a
journalist, remember! – but it does look as though, for the time
being at least, Japan is a country worth paying close attention
to.