The case for Japanese Equities is showing signs of improvement that is bringing professional investors back to the discussion table with investment managers. There are many things to be positive about:
Corporate reform momentum has been continuous, having been kick-started by Shinzo Abe and carried forward by Prime Minister Fumio Kishida.
Almost half of Japanese Companies have on average 20% of their equity value in cash.
On an absolute basis, Japan has delivered lower returns than other developed markets over the past decade. However, digging deeper, these returns have been driven by earnings and dividends, and not by P/E multiple expansion, as in the US, Europe and the UK. Since 2013, dividends for the Tokyo Stock exchange have doubled.
And there's more to be positive about in Japan:
Inflation is back - 12m Headline Japanese CPI rose to 2.5% at the end of April 2022, compared to an average of 0.3% over the previous 30 years. In itself a milestone that has the potential to shake up the dormant status quo.
Wages may be on the rise - Japanese companies had given up trying to raise prices against an inelastic consumer, which in turn removed the need for employees to demand wage increases to counter the cost-of-living increases. In many respects companies may be to blame for their inability to raise profits at home. Corporate Japan encapsulates a job-for-life environment and mechanical pay increases linked to promotion, not performance.
But with Prime Minister Kishida's now providing tax incentives to raise wages, and the Bank of Japan's 'downgrading' of it's perception of price risks from 'skewed to the downside' to 'balanced', the non-consequentialist view of inflation in Japan could change. Or at least with the younger demographic.
Nippon Individual Saving Accounts (NISA)
In March 2022, net inflows into tax deferred accumulation investment plans increased by 20%. Early signs that young people are leaving the 'zero-inflation' mindset camp.
Collectively, the continuance of domestic policies to increase, wages, productivity and equity participation, seems to be yielding shoots of success. Which in turn has professional investors reconsidering raising allocations.
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