Investing in a new Japan
Junichi Inoue, Head of Japanese Equities, explains why Japanese stocks have become much more investable today.
3 minute watch
Key takeaways:
- Japan’s economy is experiencing a turnaround. Inflation, absent for decades, is prompting companies to reset margins and maximise profits, and we have seen a return to positive real wage growth recently.
- Additionally, corporate governance improvements are driving shareholder value, seen in rising dividends and share buybacks.
- The growing attractiveness of Japanese stocks is supporting the potential for attractive long-term returns in this overlooked asset class.
Capex: capital expenditure relates to money spent on long-term investments to acquire, upgrade or extend the life of fixed assets such as buildings, machinery, equipment, vehicles, and technology in order to maintain or improve operations, expand the business, and foster future growth.
EPS: Earnings Per Share is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares. A higher EPS indicates higher company profitability.
Real wages: takes into account changes in prices across time (eg. inflation), providing a measure of the actual purchasing power that workers have from their earnings.
Share buybacks: when a company buys back its own shares from the market, it leads to a reduction in the number of shares in circulation, and as a consequence increases the value of each remaining share. Buybacks typically signal the company’s optimism about the future and a possible undervaluation of the company’s equity.
I have been investing in Japanese equities for almost three decades. Today, it is a much more investor-friendly asset class.
A significant transformation of the economy and corporates is occurring, which is driving the potential for more attractive long-term returns in the asset class. Inflation is a new thing for the Japanese as there was an absence of it for the last almost three decades.
Initially, companies struggled with margin shrinkage but decided to pass on the costs onto prices. Now, companies are seeing this as an opportunity to reset margins and maximise profit. Consumers initially struggled to accept the price hikes but now it has become the norm. As prices are increasing, consumers are not postponing their purchase decisions anymore.
So as a business, capex [capital expenditure] decisions tend to be much quicker than they were in the past, which is accelerating the economy.
Real wage growth has turned positive this summer, for the first time in years. I believe there is a positive cycle established in the economy. 2
There has been good progress in terms of corporate governance change in Japan. It is very important to know who owns Japanese companies. It used to be financial institutions like banks and companies. They didn’t care about minority shareholders.
Now foreign investors own more than a third, and Japanese institutional investors also own a similar amount. Investors like us are the majority.
The government made sure by introducing Corporate Governance Code and the Stewardship Code to make sure that we talk to each other, and companies eventually create shareholder value.
Dividend growth for the past ten years has been higher than EPS growth, and if you include share buybacks, payout to shareholders is even greater.2
This is how investors will be rewarded through a corporate governance change improvement. These are just some of the many supportive reasons why we believe investors should consider the potential that Japanese equities can deliver over the long term.
1 Source: Moody’s Analytics, Japan economic indicators as at Q2 2024.
2 Source: Morgan Stanley, Janus Henderson Investors as at June 2024. Comparison of Japanese companies’ total dividends and share buybacks in 2015, 2020 and 2023. Past performance does not predict future returns.
3 minute watch
Key takeaways:
- Japan’s economy is experiencing a turnaround. Inflation, absent for decades, is prompting companies to reset margins and maximise profits, and we have seen a return to positive real wage growth recently.
- Additionally, corporate governance improvements are driving shareholder value, seen in rising dividends and share buybacks.
- The growing attractiveness of Japanese stocks is supporting the potential for attractive long-term returns in this overlooked asset class.