Regular readers will probably realise we remain fans of the Japanese market in 2024, having tipped it at the start of the year. Plus our tips list now features Japanese names like property developer Ichigo and hotel owners Tsukada Group.
While the benchmark Nikkei 25 index was trading relatively flat in 2H, many fund managers are still bullish on the prospects for Japan in the first half of this year.
1. Macro environment
The macro environment in Japan presents reasons for optimism. The impact of the corporate governance reform agenda in Japan which has gained critical momentum and continued shareholder reforms provides a tailwind for investors. Many economists think the central bank will take some time before it starts tightening, ending a seven year policy of capping long term interest rates. The Bank of Japan is treading cautiously as it wants to avoid a contraction in the economy, but this means the money supply situation looks very different from that in many other G7 economies.
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2. The weak yen
The weak Yen makes Japan highly cost-competitive, both for tourism and manufacturing. Inflation has continued to creep higher having returned after a 30-year absence and with wage growth and increased spending, we see a more rational allocation of capital and improved productivity. The JPY will also help with Japan’s export sector. Many investors in the FX market are anticipating a reversal of what has been one of the winning FX trades of 2023: long JPY vs USD.
3. Favourable environment for stock selection
Although markets are unpredictable, we believe the dynamics set up a favourable environment for active stock selection,” says Joe Bauernfreund, manager of the AVI Japan Opportunity Trust [AJOT]. “For example, Toyota Motors – one of Japan’s last holdouts to reform its balance sheet – will partially unwind its cross shareholding in Denso.” We have seen from our own research in Asian stocks that there are some fundamentally high quality companies also trading in the small and mid cap space in Japan.
4. Corporate governance reforms
The Tokyo Stock Exchange’s has said that it will add further pressure by calling on the over 1,000 companies in parent-subsidiary relationships or that have listed or equity-affiliates to increase disclosure around their rationale for having listed subsidiaries and their efforts to ensure their independence. At the start of 2024, the TSE continued its pressure by requiring companies listed on the Prime market to disclose key information in English. This push is also coming from the Japanese financial regulator and the government, as they are keen to make Japanese companies more competitive.
5. Future monetary policy from the Bank of Japan
A change in the fortunes of the JPY, could benefit investors. The Bank of Japan’s expansionary monetary policy over the past five years has weighed heavily on the Yen, which on an effective real exchange rate basis is at the cheapest since the early 1970s. Even a small adjustment in monetary policy could lead to a stronger Yen. This could be a driver for attractive absolute returns as well. “The cascade of events in 2023 are, in our view, a seminal moment in the long and winding road to unlocking the enormous value trapped in Japanese companies,” said Bauernfreund.
6. Innovation
A quick word also on innovation. Japan is the first big Asian economy to have to grapple with a rapidly ageing population and the consummate labour shortage. A very strict immigration policy has also contributed to this. In turn this means the country is increasingly turning to automation to fill these gaps. This tends to be in areas like manufacturing and construction, which have tended to rely on cheap labour. We are also seeing Japanese companies pioneering the use of robots in areas like logistics. This pace of innovation is being forced on Japan, but will be closely watched by other countries with ageing populations, like most of Europe, and importantly, China.