Japan’s medium-sized stocks provide shelter from trade wars

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Global markets reacted immediately to Donald Trump’s election victory. Japan was no exception, with key indices enjoying a lift. While the initial impact will fade quickly, concerns over the pursuit of protectionist trade policies are set to linger. It is necessary to judge carefully how policies announced at the time of the election are actually implemented; how might they affect individual companies?

In this environment, mid-caps focused on the domestic economy – which are generally well insulated from external macro factors and beneficiaries of reshoring – represent attractive opportunities. Meanwhile, Japan-specific developments, such as reflation and corporate-governance reforms, are multiyear structural factors creating new investment ideas.

Where to invest in Japan

Miura (Tokyo: 6005) is a global leader in so-called once-through boilers, which offer superior energy efficiency. The company has an excellent business model based on the provision of contract-based maintenance services, which are conducive to recurring and stable profits. I have been impressed with the strategic changes that the company has implemented, particularly its efforts to reduce its dependence on the Chinese market and to broaden its product line-up.

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Miura recently acquired a major player in the US, Cleaver-Brooks, which will provide a new growth driver for the firm. Following the US election, the issue of tariffs is likely to dominate headlines for months to come and it makes sense to hold reshoring beneficiaries such as Miura that can deliver stable earnings.

Ryohin Keikaku (Tokyo: 7453) runs the Muji brand of general merchandise stores and is a company I have actively engaged with for many years. Management is executing its strategy incredibly well and the business is generating double-digit growth rates at home and in China, where a combination of internal initiatives and macro factors are supporting a pick-up in demand.

In Japan, strong sales growth, underpinned by successful new products and price hikes, is leading to lower discounts and higher profit margins. At the same time, the reflation story in Japan, fuelled by a shift in price and wage-setting behaviour, is supporting a pickup in consumption that Ryohin Keikaku is well positioned to capture through new store openings and popular product lines. I expect the company to deliver double-digit profit growth through fiscal 2027. A forward price/earnings (p/e) ratio of around 13, excluding cash, leaves plenty of upside potential.

Sanrio (Tokyo: 8136) sells Hello Kitty and Friends merchandise and operates Hello Kitty theme parks, with around 70% of sales generated in Japan. Hello Kitty was created in 1974 and remains a popular and beloved character in Japan and globally, as evidenced by the inbound tourists that visit the company’s parks. Moreover, Sanrio is ideally placed to capture the structural growth of the Japanese character intellectual property (IP) market and its character diversification strategy is helping to reduce earnings volatility.

The company’s strategies in the licensing business are working very well in both North America and China, which are contributing to an improvement in overall profitability. Sanrio recently upgraded its full-year guidance and I expect it to deliver double-digit profit growth over the next two to three years, justifying its valuation premium.

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Nicholas Price, Fidelity Japanese Values