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Multi-Asset view: Is there value left in Japan?


Corporate governance reforms introduced by the Tokyo Stock Exchange (TSE) have helped to revive Japan’s equity market – succeeding where Abenomics failed over a decade ago.

In early 2023 the TSE announced it was launching the reforms and listed ways in which it expected companies to improve capital efficiency and increase value for shareholders.

The TSE has said listed companies with a price-to-book ratio of less than one need to take measures to improve their corporate governance to boost their price-to-book ratio to above one. These corporate reforms are one of the main reasons we have been overweight Japan in our Marlborough multi-asset portfolios since last August. Two of the Japanese equity funds we hold are M&G Japan and Man GLG Japan CoreAlpha, which are both relatively concentrated portfolios. One has 60% of its equity exposure to companies with a price-to-book ratio of less than one. As these reforms are adopted by companies, we expect an uplift in the share price of those companies as the value trade plays out.

M&G Japan is run by Carl Vine and his team who focus on picking companies with strong prospects that are mispriced by the market. The fund is a concentrated core fund with around 50 stocks in the portfolio. Man GLG Japan CoreAlpha is a fund with a value tilt. Jeff Atherton, the manager of the fund, is a bottom-up stock-picker who invests in shares that he considers cheap and patiently waits for stock price recovery.  

Both M&G Japan and Man GLG Japan CoreAlpha performed well last year and have seen significant inflows; the funds have almost doubled in size over the past year.

We have already seen a boost to the Japanese equity market, with the Nikkei 225 up more than 40% over the past year, largely down to foreign investor flows into Japan. Indeed, Berkshire Hathaway CEO and renowned value investor Warren Buffett led the way in June last year, increasing the firm’s holdings in five Japanese general trading companies he had bought in 2021.

Off the back of the success of the TSE reforms in March 2023, further initiatives were introduced, notably the TSE’s monthly publication of a list of companies that have disclosed plans to increase their capital efficiency, thereby highlighting the laggard firms and galvanising them to take action.

While some might argue the Nikkei has topped out after its recent run, we think there are still catalysts for Japan to do well this year. For example, our research suggests there are likely to be further reforms published by the TSE.

However, the use of financial levers can have unintended consequences. The yen has recently fallen to its lowest level against the dollar in 34 years despite the Bank of Japan (BoJ) raising interest rates for the first time since 2007 earlier in March. Indeed, the BoJ finally abandoned negative interest rates, raising them from -0.1% to a range of 0%-0.1% on the back of rising consumer prices and higher wages.

In theory, you would expect the yen to appreciate with rising rates, but it has continued to depreciate. However, when the yen appreciates it is a tailwind for us as sterling investors. There is a further complication that an appreciating yen decreases earnings for Japanese companies who export their products abroad, but we still see yen appreciation as a near-term positive for sterling returns.

Japan's core consumer inflation has been hovering around the bank's 2% target after two decades of deflation, but we question whether it is as sticky as the BoJ hopes and will be keeping an eye on it. Japan imports virtually all of its energy so the higher energy prices have been a key contributor to inflation over the past couple of years.

On a more positive note, the ‘shunto’ wage negotiations that take place annually in Japan saw unions demand the biggest pay raises in 31 years last month. Whether employees will be more inclined to spend their salaries and support demand-driven inflation remains to be seen. Japanese households are more inclined to keep money in cash than spend or invest it. Indeed, Japanese retail investors have 13% of their liquid household assets in equities, compared to higher figures in the US and Europe of 40% and 21% respectively. In a bid to channel domestic cash to Japan’s stock market, the government overhauled the Nippon Individual Savings Account (NISA) in January, tripling the amount of money individuals can invest via the tax wrapper.

While initially Japanese ETFs saw outflows, there have since been positive inflows into NISA-approved ETFs and there appears to be increasing interest in Japanese-focused funds.

Whether or not a sea change in the behaviour of Japanese investors is forthcoming, it is clear Japan is undergoing a corporate governance revolution and we believe the stock market remains attractive.

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‍Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.