Why the future is bright for investing in Japan

Why the future is bright for investing in Japan

Japan is the third biggest global economy. And it’s renowned for some of the most well-known electrical brands in the world. Despite this, in terms of equities, Japan has suffered from years of sluggish growth. This has traditionally put many investors off.

Since the boom-and-bust years of the 1980s, returns from Japan’s market have been relatively poor. Before the collapse, Japanese companies were massively indebted. Years of cheap credit and global dominance had led to Japanese businesses borrowing without end. The corporate debt to GDP reached 70% by the early 1990s. And after that came an enormous hangover, with Japan’s stock market diving in value by 75% by 2010.

Investing in Japan – why it’s increasingly attractive to investors

While there have been times of optimism for Japanese equities in the years since then, it wasn’t really until the late 2010s that the market sprang back to life. By 2020, the TOPIX index rose to an all-time US dollar high and has remained near its yen peak since.

It was also the year former Prime Minister Shinzo Abe stepped down after being in power since 2012. The much-lauded economic policies instigated by Abe, which were known as ‘Abenomics’ are considered the reason economic growth was stimulated. The reform of Japanese markets that began under Abe are now continuing under the new Prime Minister Yoshihide Suga.

Abenomics consists of a three-pronged approach to improving Japan’s economy: structural reform, fiscal stimulus and monetary easing. Suga has so far been clear that he will be continuing to pursue the transformative reforms already underway. This, of course, brings the kind of stability that investors want to see. Suga is generally considered pro-markets and pro-deregulation, as well as being keen on reform and consolidation. All of this is going to definitely improve Japanese company’s profitability.

Global view of Japanese market is evolving

Now that Japan’s market is finally evolving and changing, the traditional view of corporations is also changing. There is a traditional viewpoint that Japanese companies are very stuck in the past and refuse to properly prioritise shareholder returns. This is now being challenged by a rising number of so-called ‘activist’ funds. These funds are working out ways to extract hidden value. Furthermore, we’re starting to see private equity firms getting involved too.

Investors are increasingly attracted by cash- rich balance sheets. Currently, more than half of all companies in Japan have net cash. Compared to Western markets, where just 10% to 20% of corporations are cash rich, it’s clear to see why investors are turning to Japan.

So, we’re seeing much more interest from investors in Japanese stocks, particularly investors that want to secure and fertile dividend income. The Japanese market’s dividend yield is bigger than the US market. However, there is still a lot of space for increasing dividend pay outs in Japan, as businesses are only paying out around 33% of profits as dividends.

It’s likely that some investors are still wary of investing in Japan because of the legacy of poor returns over the past few decades. This, combined with a high level of national debt and an ageing population, isn’t usually attractive to investors. But it’s definitely time for investors to look more closely at the fast-improving state of corporate Japan. With the projected post-pandemic global economic bounce will also boost this improvement.

Global economic recovery will further boost Japan’s market

Relatively speaking Japan has weathered the COVID-19 storm much better than other developed markets. This applies to both the number of COVID-19 cases and deaths and the associated financial impact of the pandemic. Japan has largely avoided the mass lockdowns that were put in place by lots of other countries. Subsequently, they have been able to limit the economic damage.

Now that there is an expected global economic recovery forecast for 2021, Japan will continue to benefit. As the Japanese market contains a number of cyclical sectors such as the automotive and industrial, it’s better placed than many others to do well from a revival in global spending and trade.

I think we’ll also see Japan benefiting from the extremely impressive recovery of China. Data form the International Monetary Fund (IMF) shows that China is the only major global economy that actually grew in 2020. Furthermore, it’s predicated that China will have the strongest growth again this year. And as thousands of Japanese businesses sell into the Chinese consumption and production markets, this growth will positively impact Japan.

The change in administration in the US also brings potential benefits to Japan. There are a number of policies being implemented by President Biden that could feasibly work well for Japanese companies. These include his environmental strategies because companies in Japan are ahead of the curve on energy-saving manufacturing. This is likely to appeal to the US administration.

Investors who are interest in Japan can choose from a large number of funds, investment trusts and exchange traded funds (ETFs). These range from specialist funds to more general funds that focus on core exposure.