Why now is a great time to buy Japanese stocks

Japan’s stockmarket is riding high after its PM announced he was to step down. But there are still plenty of bargains. Saloni Sardana looks at the reasons why now's a good time to buy into Japan's unloved stockmarket.

Last Friday, Japanese prime minister Yoshide Suga resigned, saying he would not seek re-election after spending just one year in office. 

His term, which is due to finish at the end of this month, was marred by rising Covid-19 infections and a spate of poor policy decisions. 

While it is unclear who will succeed him, the Japanese stockmarket has welcomed his departure, hitting a 30-year high. The country’s wider TOPIX Index hit its highest level since April 1991, while the Nikkei jumped to its highest level since April this year. 

There are a number of possible successors with Fumio Kishida, the former foreign minister; Sanae Takaichi, the former minister of internal affairs and telecommunications; and vaccine minister Taro Kono all popular choices.

But the outspoken Kono appears to be the front-runner and is leading in many polls, according to media reports. 

So does this usher in a new era of growth in Japan’s stockmarket? 

For Shoji Hirakawa, chief global strategist at Tokai Tokyo Research, Suga’s departure has reduced the chances of the ruling Liberal Democratic Party losing in the next election: 

“With Suga not running in the LDP leadership election, there’s less chance of the LDP losing badly in the upcoming general election -- that will give support to the stockmarket.”

As Daniel Madden, chief market analyst at Equiti Capital, tells MoneyWeek,  the market rising despite the successor not being known reflects investors’ relief. “The prospect of a new prime minister is enticing to investors as they well remember the surge in equities [in] the run up to the election of Mr Abe in 2012,” says Madden. 

In 2012, Japanese stocks rose almost 23% after Japan’s then incoming government vowed to reinvigorate the long-suffering economy. Japanese equities had been in recovery mode after hitting a low in 2012 caused by the devastating earthquake and tsunami that hit in 2011. 

But despite recent strength, Japan’s stockmarket has been unloved and misunderstood over the last several years. 

So why have Japanese stocks underperformed relative to other markets? 

Japan has been beset with decades of deflationary pressures, and despite efforts to prop up prices, deflation has remained stubbornly high. 

When inflation is high, it means asset prices are rising and it encourages investment in the stocks. The opposite applies in a period of deflation where asset prices are falling, meaning cash and other liquid assets look more attractive. 

Japanese markets have suffered the longest downward trajectory in any major stock market in living memory. In December 1989, the Nikkei index reached a record high of almost 39,000, but only regained the 30,000 mark earlier this year.

Adding to that was a downward trend in treasury yields. For the last 20 years, Japan’s market was largely a trader’s market. Investors could follow an active approach and make money by buying specific company stocks that looked more promising than others, while neglecting the overall market. Investors who chose to trade the entire market had to make sure they got their timing right, which meant it was hard to make returns.

But over the past decade, Japanese equities have fared better than the previous two decades. What changed? 

The answer simply points to one man: Shinzo Abe. 

Shinzo Abe’s sweeping changes 

In 2014, the then prime minister, Shinzo Abe, initiated a push to modernise the country’s corporate governance. He encouraged businesses to appoint more outside directors to boards and made delivering value to shareholders a core focus. 

Wouldn’t that be expected anyway from a major economy? As AVI Japan Opportunity Trust’s Joe Bauernfreund told the MoneyWeek Podcast, Japan’s market has historically been different, as post-war attitudes were much more collective and stakeholder focused than shareholder focused; Japan was much more interested in keeping as many people employed as possible, rather than focusing on specific shareholder needs.

But since the Corporate Governance Code and Stewardship code were introduced, there has been an uptick in corporate activity. 

What is the outlook? 

So with that in mind, should you buy Japanese stocks? 

Japanese stocks are rising as investors are only now realising how cheap they are, says Shoichi Arisawa, general manager at investment banking and brokerage firm, IwaiCosmo Securities. 

Suga’s exit has also triggered a rise in the country’s telecommunication companies. Shares in Japanese telcos, Nippon Telegraph & Telephone Corp and KDDI Corp have shot up since Suga’s resignation on hopes that the country’s new successor will have more favourable policies towards the country’s mobile-phone industries. Reducing the cost of mobile plans was a major focus for Suga during his short-lived premiership and even before that while he held the position of chief cabinet secretary in 2012. 

Another reason to buy is the Nikkei’s low price/earnings (p/e) ratio of 13, which is “cheap” according to Arisawa. The US market is on a rating of around 22, so it’s definitely worth keeping Japanese stocks (and particularly the nation’s telcos) on your radar.

For Japanese growth stocks, look at the Baillie Gifford Japan Trust (LSE: BGFD), while those interested in value should consider the AVI Japan Opportunity Trust (LSE: AJOT).

Recommended

The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
The new social-care levy: an unfair tax that protects the “assetocracy”
National Insurance

The new social-care levy: an unfair tax that protects the “assetocracy”

The government’s regressive social-care levy will make Britain’s tax system even more complex. Root-and-branch reform is long overdue.
18 Sep 2021
Kieran Heinemann: the history of shareholder capitalism
Investment strategy

Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of t…
17 Sep 2021
Cryptocurrency roundup: litecoin blunder, cardano update and bitcoin mining in Laos
Bitcoin & crypto

Cryptocurrency roundup: litecoin blunder, cardano update and bitcoin mining in Laos

Saloni Sardana looks at the week’s biggest stories in the world of cryptocurrencies.
17 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021