Managing Japanese equities has been a “thankless task” for the last 30 years, but the strong start they have made to 2023 means they are now investible, experts have said.
A combination of strong economic data, sticky inflation, continuing ultra-loose monetary policy and corporate governance reform have placed Japan back on the agenda of multi-asset and global equity funds managers, said Hal Cook, senior investment analyst, Hargreaves Lansdown.
The Topix index is up 23 per cent so far in 2023 while the Nikkei 225 is up 29 per cent.
Meanwhile the FTSE 100 is down 0.77 per cent and the S&P 500 is up 14 per cent.
“Interest in the Japanese stock market is at its highest for a long time, with professional and retail investors alike choosing to add some additional exposure to the country,” Cook said.
In a research note earlier this month, analysts at Peel Hunt said attitudes towards the country’s economic prospects are taking a “significant turn for the better”.
However, there are concerns that the positivity is a false dawn for the economy, which has struggled for decades.
Lost decades
The Japanese economy saw a steady deterioration in its banking system which set in during the burst of the asset bubble at the end of the 1980s.
This resulted in a systemic crisis in 1997 after a number of financial institutions failed, and the equity market has struggled to make up for these losses ever since.
During these ‘lost decades’, the economy was beset by stagnant growth and falling prices which prompted the Bank of Japan to introduce negative interest rates.
Investors were therefore underweight Japanese equities for years.
Thirty years later, the tide seems to be turning, with an increase in international fund flows reported alongside “record levels” of dividend payments from Japanese corporates, according to Peel Hunt.
Even renowned investor Warren Buffet visited the country as he increased his exposure to five Japanese companies.
“Improving corporate governance and a recognition from the JCB and central government that something has to change have both been recognised as key drivers for the market over the next few years and beyond,” Peel Hunt.
Furthermore, Japan’s core measure of consumer inflation rose to above 4 per cent in April for the first time in four decades.
There are two main contributing factors to overseas investors’ interest in Japan, said John Vail, chief strategist at Nikko AM.
“One is in the really recent past, and that is a decreased amount of interest in China as its economy seems to be decelerating.”
Japan’s membership of the G7 boosts it as a target for international investment in the short-term, and perhaps the medium term as well, he said.
The second factor is is the changing behaviour of companies towards their shareholders.
“For years, many Japanese companies gave up on…paying attention to shareholders, even talking to them,” Vail said.
“One by one they have come around, partly due to the government’s efforts to cajole them to be more open with the investment community and reward shareholders,” he said.
