Over the past five years, Japanese companies’ average pre-tax profit margin has risen from 4.5% to 7.7%, says Leo Lewis in the Financial Times. That’s miles ahead of the figure seen at the peak of the bubble era in the late 1980s, “when market valuations were stratospheric”. Japan Inc has spent years making itself leaner and meaner, but the latest jump in corporate profitability stems from cost-cutting following the global financial crisis.
Japan may have a reputation for being mired in deflation and stagnation, but the good news is coming thick and fast these days. The world’s third-largest economy expanded at an annualised pace of 1.9% in the second quarter of 2018. Japan’s GDP in 2025 is likely to be 17% higher than in 2017, according to a Morgan Stanley report – which also predicts that labour productivity will grow from 1% in 2013-17 to 1.7% in 2021-25. This will be driven by advances in artificial intelligence, robotics and automation – sectors where Japan has long been a leader. Both labour-force participation and skilled immigration have already increased and are set to rise further.
Corporate governance changes have made Japanese companies more investor-friendly. What’s more, Japanese dividends increased 14.2% in the three months to the end of June, according to the Janus Henderson Global Dividend Index. Throw in low valuations, and Japan remains one of the world’s few compelling equity markets.