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Is now a good time to invest in Japan?
Japan is set to appoint its first ever female prime minister this week. Is now a good time to invest in Japanese stocks and investment trusts?
Japanese equity performance, meanwhile, is in the process of a major overhaul thanks to a raft of corporate governance reforms from the Tokyo Stock Exchange. These reforms were initiated during the tenure of the late Shinzo Abe, who was prime minister of Japan from 2012 until 2020, and have been continued by his successors since.
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Historically, Japanese companies have been significantly over-capitalised, with large piles of cash – sometimes billions of dollars’ worth – as well as real estate and other companies’ shares sitting on their balance sheet.
“All of that is changing,” says Weindling. “They have been told, really, by the government and Tokyo Stock Exchange that the return on equity is unacceptably low, it’s not right to sit with so much cash, and to do something about it.”
Japan is set to appoint its first female prime minister, Sanae Takaichi, who is a disciple of Margaret Thatcher as well as Abe, and also used to be a heavy metal drummer. Takaichi was elected as leader of the country’s ruling Liberal Democratic Party (LDP) on Saturday 4 October, and while the LDP no longer commands a majority in either house of the National Diet (Japan’s governing body), analysts think it is unlikely that opposition parties will block her from becoming prime minister.
“I think what [Takaichi] is known for is that she is a strong believer in Abenomics and that she is fiscally expansionary,” says Nicola Takada Wood, managing director, Japan at Asset Value Investors. “She believes in loose monetary policy, she wants to invest in sectors like defence and semiconductors and space.”
Corporate governance reforms could keep driving Japanese investments
The corporate governance reforms have been a major part of the recovery of Japan’s stock market in recent years.
“Every now and again, people get renewed enthusiasm for corporate governance reform and talk about it as if it’s something new,” says Richard Aston, portfolio manager of CC Japan Income and Growth Trust (LON:CCJI) and the Chikara Japan Income & Growth Fund. “The reality is, it’s been 12 years in the making to get here. But very importantly, it’s not over.”
Takada Wood echoes this view that corporate governance reform is just getting started.
“I don’t think we’re even a third or even a quarter of the way through what’s going to happen in terms of corporate governance reform,” she said, highlighting that the Tokyo Stock Exchange currently only thinks around 15% of Japanese companies are doing a good job when it comes to implementing reforms.
Aston argues that the corporate governance reforms can upend the usual dichotomy between growth and income stocks when it comes to Japan because some high-potential growth companies are now also in a position to increase their returns to shareholders. “Historically, these companies haven’t had this relationship with shareholders, and are now in a strong position to complement that return with distributions,” he says.
Japan's macroeconomic backdrop
Besides corporate governance reform there are other macro tailwinds blowing in Japan’s favour.
Having been caught in a deflationary spiral for decades, Japan has returned to inflation.
“People are saying ‘now inflation is too high’, but that’s because the Yen is so weak,” says Takada Wood. “It’s imported inflation. It’s energy and food – if you strip that out, it’s very healthy, around 2%,” she says.
It isn’t surprising companies and individuals err towards cash hoarding given this recent history of deflation. Under these conditions cash effectively appreciates in value over time.
“The average Japanese person has a 55% allocation to cash,” says Weindling. “In a deflationary environment, that’s a good decision.”
But this sustained period of inflation has started to change mindsets in Japan.
That has also coincided with a period of sustained wage increases, which had been flat for 15 years prior to 2020. This could lead to an uptick in consumption.
Weindling, though, makes the point that it doesn’t necessarily matter when deciding whether to invest in Japan because, similar to the situation for UK stocks, there is a big disconnect between the Japanese economy and the Japanese stock market.
“The Japanese economy hasn’t grown for 15 years,” he says, “but earnings per share growth in Japan over the last 15 years is the same as the S&P 500. That is incredible, because you’ve got the S&P re-rating up to ever higher multiples, while Japan with exactly the same earnings per share growth still trades on a very significant discount to that and other major markets as well.”
How to invest in Japan
Some platforms and brokers may give you direct access to Japanese stocks. If so, there are hundreds to choose from beyond the automobile and technology stocks that many investors bring to mind when they think about Japan’s stock market.
“Take something like ASICS (TSE:7936),” says Weindling. This is one of the world’s leading sports footwear brands and is familiar to many Western consumers, but many aren’t aware that it is Japanese.
Takada Wood picks out Rohto Pharmaceutical (TSE:4527), which she stresses is not a pharmaceutical company at all but rather Japan’s leading skincare and eye drop brand. “It’s really undervalued,” says Takada Wood, “because people value it as a pharmaceutical company, and it’s not.”
While you can attempt to pick your own Japanese stocks, investing via a fund or an investment trust is often a more convenient route to gaining exposure.
The three Japan-focused investment trusts featured in this article all provide different means of exposure to Japan via their investment strategies.
Asset Value Investors manages AVI Japan Opportunity Trust (LON:AJOT) which has a focus on activism with its investments, in keeping with Asset Value Investors’ broader strategy.
“We position ourselves as the management consultancy stance; we say to companies ‘we’ve analysed your company, we really like your company, we think you’re great at X, Y and Z, but you’ve clearly got issues in other areas, and that’s what’s keeping your valuation down.”
In this vein, AJOT has been working closely with Rohto, which has been overspending on so-called ‘growth’ areas that haven’t grown, and persuading management to shift attention back towards its core businesses where they have a dominant position and high margins.
Chikara’s Japan strategy, which underpins both the investment trust and the fund, focuses on companies and sectors that generate more stable returns, more stable cash flow and which have a chance to grow over time.
“We’re not necessarily an income fund,” says Aston, “in the way that people view income funds maybe in the UK, where a lot of the companies that offer high income are troubled or broken companies.”
JPMorgan Japanese Investment Trust is the largest dedicated investment trust with a market cap of over £1 billion as of 10 October. It has a presence in Tokyo, with 20 analysts on the ground in the city, and focuses on quality and growth.
“We’re looking for the best investments in Japan on a multi-year basis,” says Weindling.
As of 10 October, these investment trusts traded on the following discounts:
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Dan is a financial journalist who, prior to joining MoneyWeek, spent five years writing for OPTO, an investment magazine focused on growth and technology stocks, ETFs and thematic investing.
Before becoming a writer, Dan spent six years working in talent acquisition in the tech sector, including for credit scoring start-up ClearScore where he first developed an interest in personal finance.
Dan studied Social Anthropology and Management at Sidney Sussex College and the Judge Business School, Cambridge University. Outside finance, he also enjoys travel writing, and has edited two published travel books.
