2023-12-13 02:15:00 ET
Summary
- Investors have cheered as Japan continues to emerge from its deflationary doldrums. We believe there’s more room for the bulls to run.
- With unique structural tailwinds and multiple macro catalysts, Japan's equity market is becoming an increasingly attractive destination for global investors.
- A primary driver of Japan's burgeoning equity market is the role of the Bank of Japan (BOJ).
By Tokufumi Kato, PhD
Investors have cheered as Japan continues to emerge from its deflationary doldrums. We believe there’s more room for the bulls to run.
With unique structural tailwinds and multiple macro catalysts, Japan's equity market is becoming an increasingly attractive destination for global investors.
Here are some key factors and trends that, in our view, make Japanese equities a compelling investment choice in the intermediate term.
Structural Tailwinds and Macro Catalysts
A primary driver of Japan's burgeoning equity market is the role of the Bank of Japan ((BOJ)). Through its accommodative monetary policies, the BOJ is fostering conditions that could lead to a weaker yen, which enhances the competitiveness of Japan's exports and potentially boosts company profits.
While the BOJ is likely to normalize its policies, a slow and measured process is expected, which supports a weaker yen.
Another critical factor is Japan's recent emergence from a long-standing deflationary period which allows for higher nominal growth - a potentially positive signal for equity investors in that it signifies a healthier, more robust economy.
The ongoing geopolitical tensions between the US and China are another key consideration. With investors seeking to diversify their portfolios amidst this uncertainty, Japan's market may present a welcome alternative within the region.
Corporate Governance Reform
Japan is undergoing a significant shift in corporate governance with an increasing emphasis on profits and shareholder value. This shift is evidenced in practices such as increased share buybacks and a focus on Return on Equity ((ROE)), both of which can enhance shareholder value.
The Tokyo Stock Exchange plays a crucial role in supporting broader reform efforts, such as its guidance that companies should focus on the price-to-book ratio.
Companies are starting to unwind the practice of cross-shareholdings, a move that we believe can enhance transparency and improve corporate governance.
Furthermore, there has been a noticeable increase in activism and engagement, auguring positive change in corporate culture.
Capital Flows
We believe Japanese equities present an under-exploited opportunity for global investors. Despite the Japanese equity market generating strong year-to-date returns (the TOPIX up ~25%), Japanese equities appear to remain under-owned by active managers.
The flow from share buybacks by Japanese corporations has been persistent and strong, and there has also been a resurgence in foreign investment and capital flows as market performance led to a profit-taking outflow in September.
Finally, the introduction of the new Nippon Individual Savings Account (NISA) is expected to stimulate domestic flows, further bolstering the market.
In our view, this compelling blend of favorable macroeconomic factors, progressive corporate reforms and continued investment flows suggests that the sun could keep shining on Japanese equities.
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For further details see:
The Sun Is Rising On Japanese Equities