For a long time, Japan was a classic example of long-term decline, with an aging population, slow economic growth, and deflation. But there is now a compelling argument to be made that the land of the rising sun, the world’s third-largest economy, is dawning a new dawn, offering attractive equity opportunities.
Many strategists say it makes sense for investors to increase their exposure to Japanese stocks, driven by changes in corporate governance and increased shareholder activism. They believe the Japanese market is on an upward trend and are happy that Japanese stocks remain affordable. The Tokyo Stock Price Index (TOPIX) is up 22% this year, outpacing the S&P 500’s 13.5%. The Japanese index has a price-to-earnings ratio of 16.2, which is better than the US index’s 21.5.
“Japanese stocks have risen nearly 20% this year, but we see structural tailwinds for further strong performance,” said a research report from JPMorgan Asset Management. A recovery in corporate capital spending is fueling optimism, the firm found.
Another benefit is that years of deflation, or at best modest inflation (less than 1%), are beginning to end, as analysts at asset management firm Schroders PLC put it: Purchased item. There’s little point in buying something now if it’s going to be cheaper tomorrow. ”
Japan, which only experienced slight inflation over the past decade, has almost returned to deflation in recent years, but steady price increases returned in 2022, rising by 2.7%, and the annual inflation rate in 2023 will be 3.2%.
Jeffrey Buchbinder, chief equity strategist at LPL Financial, said share buybacks and increased dividends are making Japanese companies more efficient at delivering value to investors. The Tokyo Exchange has been putting pressure on member companies to “increase shareholder returns, but it’s been like a hockey stick pointing up,” he added. There is a “real cultural shift” in the Japanese market.
Of course, for US investors, a strong dollar is a big incentive to buy Japanese stocks. Since 2021, the yen has depreciated by a third compared to the dollar. The Bank of Japan’s continued commitment to low interest rates means the yen is unlikely to appreciate in the near future, JPM Notes argued.
Nikko Asset Management, a prominent Tokyo-based investment firm, said Japan has a “stable political background,” with the Liberal Democratic Party and smaller allies firmly controlling parliament since 2012. , argues that Japanese stocks deserve more attention. “This unsurprising situation is helping to create a favorable environment for companies and long-term investors,” the company said in a report.
“In an era of increasing polarization, Japan’s political environment is known for its stability and political continuity,” the report said. There was no need to spell out the contrast between the situation in Japan and the situation in Washington, where the speaker of the House was ousted last week.
Meanwhile, Nikko Shimbun pointed out that a new focus on increasing shareholder value would be beneficial for Japanese stocks. The report asserted that “corporate responsibility is an increasingly important topic in Japan.”
It also pointed to a 2022 investor revolt against the management of Canon Global, a giant that makes cameras, semiconductors and other high-tech products. Fujio Matari, Canon’s chief executive and chairman, narrowly won reelection amid complaints that there were no women on the company’s board of directors. The company then pledged to add its first female director, ultimately appointing Akiko Ito last month.
All things considered, Nikko argued that today’s investors would find “a lot of value in the Japanese stock market.”
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Tags: Bank of Japan, Canon, capital investment, corporate governance, Fujio Matato, Japan, Japanese stocks, Liberal Democratic Party, stock price return, S&P500, shareholder activism, strong dollar, TOPIX