“Japan really is investible now”
Taeko Setaishi, manager of the Atlantis Japan Growth Fund, pointed to the steady improvement of corporate governance in Japanese companies as a further reason for investing.
“[This has been] driven by occasional activist forays, the steady reduction in cross-holdings, the change in Japan’s demographics from a country of workers to a nation of pensioners reliant on dividends, and incremental pressure from the stock exchange and government,” he said.
The results of this are increasing shareholder returns, for instance the adoption of 8 per cent as a minimum target return on equity, increasing share buybacks, an enhanced corporate governance code and some consolidation in overcrowded industries.
“Whilst we do anticipate that governance will continue to improve, we do not expect a sudden market-wide rush to return years of excess accumulated cash, rapid industry consolidation or activist victories,” he said.
On a cash flow and income basis, Japan has the cheapest stocks in the developed world, said James Rosenwald, chief investment officer of the Nippon Active Value Fund.
“Equities, through their dividends and share buybacks, provide the largest carry trade in the world,” he said.
“The example is Warren Buffett’s borrowing in yen and investing in equities which offer a return on equity of more than 10 per cent.
“The positive carry is positively amazing.”
It is likely investors have heard this positivity about Japan before, Cook said, as the country has had many “false dawns” over the past decade.
“This begs the question: ‘is it really different this time?’,” he asked.
Buffett’s “very public” trip to Japan in April and his increase in exposure to Japanese companies have acted as a “catalyst” for others, Cook said.
“Similarly, Japanese equity managers we have spoken to recently echo his enthusiasm, noting both an increase in potential client enquiries for their funds as well as net inflows from existing clients.”
For those worried about having already missed the gains, the number of positive factors means this market has the potential to grow over the next few years.
“Not least [as] unlike other developed markets, Japan has not been raising interest rates – meaning cash has significantly less appeal against inflation.
“Officials have pointed to the $7trn (£38mn) sitting in cash in Japan – if that flows towards the stock market it will be a welcome accelerant.”
Joe Bauernfreund, manager of the AVI Japan Opportunity fund, said he sees just one “fly in the ointment” which is capital flows.
“Japanese investors have not been big buyers of their stock market in recent years meaning that foreign flows have been a key part of the story.
