Japanese stocks offer plenty of promise at the right price

After decades of disappointment, Japan is packed with opportunities for investors, says Alex Rankine.

MoneyWeek cover image - investing in Japan
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“Welcome to the weirdest of Olympics”, says Scott Stinson in Canada’s National Post. A flare-up in Covid-19 cases prompted the city to bring in strict restrictions, so the games opened in an expensive, gleaming but almost empty stadium – “not exactly what Tokyo first had in mind”.

“I feel sorry for the organisers,” says Liam Halligan in The Daily Telegraph. “They are trying to stage the biggest sporting event on earth… under astonishingly difficult circumstances.” A bar on spectators means the hoped-for boost to the local leisure industry won’t materialise. “The contrast with the 1964 Tokyo Olympics”, which came to symbolise Japan’s “astonishing post-war economic renaissance… is heart-breaking.”

Decades of disappointment

The post-war boom ended in the early 1990s. The Nikkei-225 index peaked close to 39,000 in 1989 and has never returned to that level. This week, at around 28,000, it was still 28% short of the 1989 peak. The Topix index, a more accurate measure of the market than the Nikkei, finally regained its 1991 levels in February 2021.

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Japan’s markets have suffered “the longest downward phase in any major stockmarket in living memory”, says Ian Cowie in The Sunday Times. “Even very patient investors cannot be sure of topping the podium”. Still, this is the world’s third-biggest economy and “the first step towards making a profit is often to buy low”. On a price/earnings (p/e) ratio of 17, Japan is much cheaper than America’s rating of 22.

Japanese shares have underperformed this year, says Rosie Murray-West in The Mail on Sunday. The country “had controlled the spread [of Covid-19] so well that it has been complacently slow to roll out a vaccine programme”. Still, with 37% of the population having received a first jab, it is now getting its act together.

Land of opportunity

Japan is “packed with opportunities, especially in digitalisation, robotics and electric cars”, says Chern-Yeh Kwok of the Aberdeen Japan Investment Trust. The online economy is less mature than elsewhere, says Murray-West, leaving more scope for future growth: “We may think of Japan as a land of bullet trains and robotic convenience, but it is also a country that continues to be reliant on fax machines and where only 8% of purchases are made online”. Prime minister Yoshihide Suga is trying hard to change that.

For all the doom-mongering, the Nikkei has actually grown at a compound 9.8% annually over the last decade in sterling terms, says Simon Edelsten in the Financial Times. That is behind America but better than the FTSE, Europe and even emerging markets. Japan’s economic performance has been mixed, but the stockmarket is “dominated by multinational companies”, much of whose income is earned abroad. Japan offers investors access to the Asian growth story combined with the comforts of investing in a developed market. Investors may want to take a look at the JPMorgan Japan Small Cap Growth & Income (LSE: JSGI) and the Baillie Gifford Japan (LSE: BGFD) investment trusts.

Japanese corporate governance enters the modern age

Japan’s shareholder “revolution” still hangs in the balance, says Mike Bird in The Wall Street Journal. In 2014, then-prime minister Shinzo Abe initiated a push to bring corporate governance into the modern age. He put pressure on businesses to appoint more outside directors onto boards and to focus on delivering value to shareholders. Risk-averse Japanese managers had long preferred to hoard cash rather than invest it or pay it out to shareholders as dividends.

The war is still being waged across Japanese boardrooms, says Bird. On one side, activist foreign investors; on the other, old-school managers who don’t like being told what to do. Take a recent quarrel at Yakult, the probiotic drink maker. Activist investors see an established brand with a golden opportunity to capitalise on the global wellness trend and expand overseas. Yet the firm’s board is stuffed with company insiders and “has gone from having two non-Japanese members… to having none”.

Conglomerate Toshiba was revealed this year to have “colluded with the Japanese government to suppress activist investors”, say Leo Lewis and Kana Inagaki in the Financial Times. Investors also complain that reforms designed to clamp down on cross-shareholdings – another tactic to limit shareholder influence – have been watered down.

The tide is turning in favour of the activists, says Carleton English in Barron’s. Shareholders forced Toshiba’s CEO to resign in April. Those wins are encouraging other campaigns: data from Lazard shows that Japan played host to 26% of non-US activist campaigns in the first half of 2021, up from just 6% in 2015. “Challenges at Japanese companies were once unthinkable”; now the country is becoming a “hotbed” for shareholder activism.