Oct 13, 2023 Equities

Reasons to look at Japanese stocks

Japan's economy is up and running, companies are making money and increasingly thinking about shareholders, and now the recent slide in share prices may offer a better entry point.

Japan's Prime Minister Fumio Kishida complained a few weeks ago[1] that an excess of tourist visitors was pushing some places in the country to their breaking point and that countermeasures needed to be considered. Japan's capital markets can't complain about overinvestment by foreign investors, who have tended to avoid the market. But their interest has been aroused recently, not least after Warren Buffett's activity in Japan came to light in the spring.

And indeed, the market has made decent gains, holding up well for some time even as other major markets began to weaken. And rightly so, we believe, because from a fundamental and technical point of view, there is a lot to be said for Japanese equities. For the first time in two decades inflation is worthy of the name. But, at 3-4%, it is not yet forcing the central bank to act. For this reason, the Bank of Japan (BoJ) is likely to remain for the time being the only G7 central bank with a loose monetary policy.

Japan’s equities in yen and in euro, compared to European equities

Sources: Bloomberg Finance L.P, DWS Investment GmbH as of 10/10/23

Meanwhile inflation is pushing nominal GDP up significantly: at 5.1% year-on-year, it grew in the second quarter at the fastest rate since 1991, excluding the exceptional, Covid-influenced, second quarter of 2021. This has given companies some pricing leeway for the first time in a long time and provided a margin boost leading to the fact that listed companies are expected to post double-digit profit growth this year.[2] Consumption is benefiting from both savings accumulated during the pandemic and the aforementioned resurgence in tourism. Japan also offers a good opportunity for investors who do not want to invest in China to participate in Asia’s economic growth. Last but not least, the restructuring of the Japanese corporate sector is progressing, partly because the Tokyo Stock Exchange has increased the pressure on listed companies to reform. Selling unprofitable subsidiaries frees up cash for shareholders.  

Is it still worth getting into the Japanese market after it has already had such good times this year? Our Chart of the Week may help answer the question. The MSCI Japan index has in fact given back almost all the gains it had built up since the spring within two weeks. Secondly, the market owes a large part of its rise this year to the weakness of the yen. In euro terms, the index has hardly outperformed European equities[3] over the last three years, and this year has significantly underperformed them. So there can be no talk of relative outperformance yet. But we do not expect the yen to depreciate that much for a second year.[4] And what would be particularly interesting for foreign investors is currency appreciation.

"We think Japan's equities are fundamentally attractive and not too expensive, especially after the recent correction. Foreign institutional investors are still underweight Japan overall in our view and may also increasingly see Japan as a better alternative to China, which is difficult to invest in," says Lilian Haag, senior DWS portfolio manager responsible for Japan. However, she adds that a stronger than expected economic downturn in the U.S. or Europe would not leave Japan's export-oriented, relatively cyclical stock market unscathed

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1. https://www.japantimes.co.jp/news/2023/09/06/japan/society/overtourism-countermeasures-kick-off/

2. Unlike in most other major markets. Source: consensus figures collected by Bloomberg Finance L.P. as of 10/10/23.

3. As measured for example with the MSCI Eurozone Index.

4. The yen is trading at the lowest to the dollar since the early 1990s. Source: Bloomberg Finance L.P.

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