Insights on Japan

Following a year-to-date rise of 17%, Japan’s Nikkei 225 has finally surpassed the high it achieved way back at the end of the asset bubble in 1989. Although the weak yen has reduced returns for overseas investors, they have still been attractive – up 23% and 40% in sterling terms over the last one and five years.

The positive trend has been spurred on by several factors.  Firstly, valuation. Japanese stocks traded at a discount to many of the high-flying names that populate US stock indices. That is still the case.

The market has been helped by a flow of domestic household investment following the launch of a government-subsidised saving scheme. According to the Nikkei newspaper, NISA purchases of equities through the leading online brokerages reached $3bn in the first two weeks of January, almost three times the record for a single month. However, for the trend to continue, overseas investors must also remain onboard. The enthusiasm sparked last year when Warren Buffett’s Berkshire Hathaway increased its stake in a group of Japanese trading houses, needs to continue. It’s helpful that Japanese equities remain under-owned outside Japan at a time when global asset allocators remain cautious on China.

Thirdly, there is a real sense that Japan has thrown off some of the shackles at the corporate level that have held back returns in the prior decades as management teams have become more focused on shareholder returns. In January, the Tokyo Stock Exchange published its first list of companies that have issued plans to improve their valuations, with around 40% of companies already announcing their strategies.

There are uncertainties. One is political risk with the possibility of a change of prime minister over the next year. Another is monetary policy – the central bank maintained interest rates at its January meeting but the next gathering in March comes at a time of annual corporate wage negotiations. With inflation falling and subdued economic growth, now might not be the best time to lift rates.

Overall, Japanese equities have proved they can be a source of return diversification which we believe investors should consider when building a portfolio.