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Japan equities the bright spot in global investment landscape

Rainer Michael Preiss
20.07.23 11:25
In a world where geopolitical risk is rising and when there is a war in Europe and Ukraine is impacting European economies and markets, one large cap market in the world is gaining more and more investor attention - Tokyo Japan.

The increasing conflict between the USA and the People’s republic of China is leading to increased capital flows into the Japan Tokyo market and JPX Japan exchange listed stocks and companies.

Japan, one of the world's major economic powers, has been recently stepping up efforts to create innovations and improve its investment environment for foreign companies.

The Japanese equity market Japan exchange group JPX is the 3rd largest equity market in the world and responds to global economic conditions more sensitively than other developed markets.

Many global investors, however, until this year, still associated investing in Japanese equities with "Japan lost decade "and the narrative of Japan as a country with no growth and a stock market that chronically underperformed the U.S. and even European equities.

Long Japan has been “consensus” for most of this year and seasoned investors might want to remember the timeless and profitable wall street proverb “ just because it is consensus does not make it wrong”

So far this year the Tokyo market and its over 3500 listed Japanese companies have outperformed the broad-based United States equity market.

BlackRock and other major European and U.S. asset management companies are upgrading their ratings for Japanese stocks, a shift that could increase the flow of money into the country's market and sustain its growth, while Switzerland’s UBS also re-iterated it bullish stance on JPY (Japanese yen assets) but stated they would be buyers on any pullback in the Nikkei 225 index

UBS Global Wealth Management is waiting for a 5% to 8% correction on the basis that valuations are “no longer depressed” and share buybacks — a key tailwind — will be “muted” during the summer months. Japanese shares have rallied to a 33- year high on hopes that the nation will beat deflation and continue corporate reforms to boost shareholder returns.

BlackRock, the world's largest asset manager on the other hand raised its rating for Japanese stocks from underweight to neutral at the end of June based on Japanese companies' aggressive shareholder returns.

During the last two lost decades of the Japanese economy and the Nikkei, the stock broking industry and wall street marketing even came up with the marketing name of Asia EX- Japan

Many global investors had lowered the ratio and allocation of Japanese shares in their portfolios to less than that in global stock indexes. Goldman Sachs found that the ratio of Japanese stocks held by global investors was more than 7% lower than the MSCI's index for developed countries outside North America as of the end of May. With the rise in Japanese stock prices, that underweight has probably only increased since then.

In the 1970s and 80s, Japan was the forge of the world’s fantasies: shinkansen bullet trains, Karaoke and the Walkman, Manga and anime, Pac Mam and Pokémon, online image boards and emojis.

Especially since the rise of China, Japan as an investment market was out of favour due to Japan’s the so-called lost decades of recession and social dysfunction and even stock brokers referred to the country and its stock market as Asia -ex Japan.

The decline of Japan’s electronics industry has been highly visible, since the brands that have faded- Sony, Sharp, Hitachi, Panasonic and many others – were once standard features in many middle-class homes around the world. Japan was chasing the world’ leading manufactures by making incremental improvements to existing techniques. This proofed a disadvantage when the world moved from analogue to digital, where the goal was to invent whole new ways of doings things. Mark Zuckerberg and Facebook mantra was “ move fast and break things”

Part of Japan’s problem has been referred to as the “Galapagos syndrome” named after Charles Darwin’s observation about how animals adept to specific environments, in Japan it had come to mean the development of technology too narrowly catered to the obsessively finicky home market.

Today, Portfolio managers are having to factor a stronger yen into global stock selection in way they have not for years, with some even anticipating mergers and acquisitions as the Japanese market revs up.

During the bubble years of the Tokyo real estate and stock market boom, the chairman of Japan Nomura Securities graced time magazine cover with the caption “Yen power” Nomura securities was 40 Times bigger than America’s Merrill lynch in 1988

Improving shareholder returns, governance reforms are reason the analyst community and banks are citing for upgrades of Japanese equities today.

The country's progress on exiting deflation and reforming corporate governance contributes to the shift in views on Japanese stocks. As consumer prices in Japan continue to climb, companies are expected to place greater emphasis on shareholder returns and capital efficiency.

Japan’s major breweries are giving investors plenty to cheer about as their shares outperform the broader market on prospects of price hikes, more favourable taxation and a rebound in tourism.

The rebound in Japan tourism is also expected to benefit JR (Japan railways) and Japan airports stock prices.

Older investors most probably will recall the days and years when the JPY Japanese yen was a safe haven currency and was strong against most currencies in the world. This year it seems that broad based JPY weakness has run its course and according to the latest Bloomberg consensus view the Japanese yen is expected to appreciate back to the 120 level against the U.S. dollar

Japan as the land of the rising stock market and stronger yen currency most probably will benefit global investors and their retirement portfolios.

Rainer Michael Preiss is Partner & Portfolio Strategist at Das Family Office in Singapore.

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