Japanese investment opportunities exit the deep freeze
JAPAN is a country that is often overlooked by investors ... with good reason some would say.
It has been in the doldrums for decades but last year showed signs of a turnaround, which has extended into 2024.
So, is it time to reassess the prospects for the Land of the Rising Sun?
Kathleen Brooks, founder of Minerva Analysis, highlights how the stock market bubble that burst 35 years ago still “haunts” investors and fund managers when it comes to putting money into Japanese stocks.
It peaked in 1989, and, in the years since, the Nikkei and the Topix indices proved unable to break higher ground. Unsurprisingly, the global investment community shunned Japan. Even today, four in five active fund managers are underweight in Japanese shares.
Deflation has been the other nightmare.
Fidelity International comments: “The excesses of the 1980s took a long time to unwind, as did the dismantling of opaque corporate structures and restructuring of bad debts. The biggest problem however was deflation, which became entrenched during the late 1990s and 2000s. This created a downward spiral of falling prices and deferred consumer spending. Today, Japan is the only major country where inflation is viewed as an asset.”
However, finally, the ‘forever’ peak has been surpassed.
This February the Nikkei 225 Index finally forged through the 39,000 level, setting a new benchmark by a whisker.
Has the corner been turned? There is reason for optimism, but risks remain. Fidelity cites interest rates and a weak currency as being behind the recent resurgence.
Pointing out that Japan’s lending and borrowing barometer was still at minus 0.1%, it stated: “Ultra-low rates have boosted Japan’s growth potential and the competitiveness of its export sector by virtue of a weak yen. Two years of inflation staying above zero have also reinforced sentiment.
“Another factor is probably Japan’s location at the heart of Asia. Some investors have been unnerved by setbacks in China since the pandemic, improving the chances that Japan returns to being the default choice for investors seeking a regional exposure.”
Playing a part have been corporate governance reforms enacted by the Tokyo Stock Exchange, the Bank of Japan’s accommodative policy stance, renewed buying among overseas investors, upbeat earnings results, and share buyback announcements.
Fidelity notes reasons to be cautious, though, not least that the economy fell into a technical recession in the final quarter of 2023.
“It’s important to remember that Japan continues to face difficult hurdles. It remains home to a rapidly ageing population and births are at a record low. Japan also experiences difficulty in attracting international talent owing to an unfamiliar language and culture, and resistance to immigration among some sections of the population. The biggest risk is a return to deflation – but we believe the chances of this are low.”
It talks of “an even balance of pros and cons for investors in Japan”, especially as Japanese shares are no longer cheap.
Yet it remains upbeat overall given the shift to moderate inflation and its impact on spending and investment decisions by households and corporates, combined with steady progress in governance reforms and light positioning among investors.
“We believe that the long-term outlook for Japanese equities is positive and valuations are still attractive.”
Kathleen Brooks takes a similar stance. She said: “Japan’s stock markets should once again be part of the conversation when investors are creating regionally diversified portfolios. After many years, Japan is becoming an interesting investment opportunity again, and it’s certainly worth watching what its stock markets do next.”
However, do not transfer your holdings in other global markets just yet, she warns.