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06 August 2018
By John Lothian
Japan is arguably the investment world’s most overlooked developed market. It is the world’s third-largest economy after the United States and China, and accounts for over 8% by value of the benchmark MSCI World index of developed markets’ largest listed companies.
Yet investors often ignore Japan’s investment potential. After all, economic growth has remained weak since 1990 and forecasts for future growth are typically tempered by the country’s ageing population and shrinking workforce.
However, as a long-time observer, I believe that Japan today has little in common with the usual cliché depicting it as a sleepy ex-economic powerhouse in decline.
To many critics, the results of ‘Abenomics’ – a package of economic policies that have aimed to stimulate the Japanese economy since 2012 – have been underwhelming.
Yet there has been meaningful progress made towards tackling the twin challenges of economic stagnation and falling prices, known as deflation. While below target, consumer prices have at least been rising, as have wages. And until the start of 2018, the economy enjoyed its longest continuous growth streak since the 1980s – eight consecutive quarters.
Unsurprisingly, and pertinently for investors, there has been a corresponding growth in the profits of Japanese companies.
While a shrinking population is leading to a labour shortage, the government has taken measures to increase female work participation and is allowing more foreign workers in Japan. Low productivity – another issue that has plagued the economy – is also being tackled, in part, through investments in technology and automation. But there is a long way to go yet, and this means there are significant opportunities to increase the economy’s productivity.
In addition, corporate Japan has become more shareholder-friendly. A new corporate governance code took effect in 2015, requiring a minimum of two independent directors and encouraging boards to be at least one-third independent. This represents significant progress.
Moreover, under pressure from the Government Pension Investment Fund, the world’s largest pension fund, many Japanese companies are shedding the excess cash they have traditionally hoarded, in favour of increasing dividends and buying back their shares. Indeed, dividends paid out to shareholders by Japanese companies rose from US$50 billion in 2014 to US$70 billion in 2017.
We are seeing increased merger and acquisition activity as well, both domestically and overseas. More Japanese companies are expanding overseas or acquiring foreign competitors to gain access to growing markets. I envisage this trend continuing, at a time when many Chinese companies are limiting their outward investment due to currency constraints and their US counterparts are focusing more of their investment domestically.
There will always be some investors who are inevitably pessimistic about the Japanese market, and there’s enough data they can highlight to confirm such negative bias.
However, I believe there are important long-term structural changes that are taking place, bringing Japan back to the big league of investment opportunities globally.
Please remember that past performance is not a guide to future performance. The value of investments goes up and down and will fluctuate over time, and you may not get back the original amount you invested.
The views expressed in this document should not be taken as a recommendation, advice or forecast. We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.