Five reasons to invest in Japan

Chris Salih 18/10/2022 in Equities, Asia/Emerging Markets

Should you put your money into Japan? How likely are you to enjoy a handsome return from investing in this fascinating country?

As an open and cyclical market, it can be vulnerable to a global slowdown, particularly as it faces surging energy prices as a net energy importer. However, relative to other markets, there are good reasons why Japan may fare better than other peers.

Here we highlight five reasons why it could make sense to have some Japan exposure in your overall portfolio.

Reason one: Strengthening economy

The economy is expected to pick up from its slow start to the year, with GDP growth projected to be 1.7% in 2022 and 1.8% in 2023, according to a report from the OECD*.

“In the face of the Omicron wave and energy price surge, the Japanese government supported vulnerable households and affected businesses,” it stated. The study also highlighted how the government has acted to address supply bottlenecks, including taking action to support investment in semiconductor capacity.

People are flocking back to enjoy shopping, eating out and travelling in the wake of Covid-19 restrictions starting to ease, according to an update from the Comgest Growth Japan fund. “International tourists are gradually returning, and the direction of travel is heading towards economic normalisation,” it stated. Looking ahead, Comgest believes this revival in consumer spending and international tourism can help deliver a profit boost to businesses in these areas.

Reason two: Home to global companies

Japan is home to plenty of global household names. A look at the 10 largest holdings of the AXA Framlington Japan fund illustrates this point. The portfolio’s manager, Chisako Hardie, is vastly experienced and invests in long-term structural growth companies.

Toyota Motor Corp is currently her biggest single stock position with a 3.6% of assets under management**. The company, which was founded in August 1937, is one of the largest vehicle manufacturers in the world. Other prominent holdings include Daiichi Sankyo Co Ltd – the global pharmaceutical company, and Hitachi Ltd.**.

Reason three: Has enjoyed corporate reforms

Modern companies in Japan have certainly changed their approach over recent years – and this is a positive, according to M&G. In an analysis of opportunities earlier this year, it argued that the country may be the ‘best market globally’ for earnings growth over the coming decade.

Sunny Romo, investment specialist on the M&G Japan fund, told us more about this in a recent video interview, which you can watch here.

She also highlighted how reforms brought in by the late Shinzo Abe, during his time as Prime Minister, had transformed the Japanese corporate landscape, and paved the way for self-improvement.

Reason four: Companies are looking healthy

Archibald Ciganer, manager of the T. Rowe Price Japanese Equity fund, is relatively optimistic about the financial well-being of many companies. “Despite the current uncertainty in the global economy, Japan’s corporates continue to buy back stock and return capital to shareholders at record levels,” he said.

The Tokyo-based manager, who has run the portfolio since December 2013, believes there are two reasons why this can be seen as a positive. “This is a very encouraging sign about the health of the corporates, in our view, as well as signalling the ongoing improvement in corporate governance at the company level in Japan,” he said. What’s more, these companies are relatively cheap. “With Japan trading below average, we believe an economic slowdown is priced in,” commented the T. Rowe Price team. “If the world can orchestrate a soft-landing for the Global economy, Japan has the potential to re-rate from attractive level in our view.”

Reason five: Plenty of choice for managers

There are plenty of attractive companies in this country for portfolio managers to consider, according to the Baillie Gifford Japanese fund, which is run by Matthew Brett. “We believe the Japanese equity market offers active managers a broad selection of high-quality companies capable of delivering attractive and sustainable earnings growth for shareholders,” the team stated.

“In contrast to other major markets, growth often commands little or no valuation  premium in Japan,” it added. “We continue to identify global leading businesses which trade on a substantial discount to their peers.”

Matthew also says that the weaker yen has been helpful to exporters that had been facing less demand due to the slowdown in the global economy – a point also made by the team at T. Rowe Price.

“We think the yen is undervalued, trading around 25-year lows versus the USD,” it said. “The weak yen has been supportive for Japan’s competitiveness and has been a boon for the exporters. The primary driver of yen weakness is high US inflation. In Japan however, inflation remains broadly in line with the Bank of Japan’s target; they do not need to hike interest rates.”

Elsewhere, Sophia Li and Martin Lau, who run the FSSA Japan Focus fund, are currently positioned towards firms with exposure to domestic demand due to the global uncertainties.

“The companies we like to own are managed by strong management teams and can generate sustainable earnings growth and return on equity without relying on leverage or the macro environment,” they said.

*Source: OECD, Japanese Economic Snapshot, Economic Forecast Summary, June 2022
**Source: fund factsheet, 30 September 2022

Photo by Jezael Melgoza on Unsplash

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