It has taken thirty-five years for the Japanese Stock Exchange to escape the pernicious effects of the financial bubble that the country experienced in the late 1980s. The NIkkei 225 index returns to historical highs above 40,000 points, after a long journey of disinflation, negative rates and continuous intervention by its central bank, the Boj, in the financial markets, buying bonds and also stocks. Last year inflation returned to its economy and it is expected that, finally, the Boj will raise interest rates this year, which have been anchored at -0.10% since 2016. “After three decades of low prices, and even of deflation, moderate inflation is welcome in Japan. Deflation leads companies and consumers to delay investment and postpone purchases; There is little point in buying something now if it will be cheaper tomorrow. On the other hand, moderate inflation gives companies confidence to invest in the future and encourages consumers to spend,” explains Alex Tedder, head of global equities at Schroders.
But this return to inflation is not the only reason for analysts' optimism about the resurrection of a Japanese stock market, ignored for many years by international money and which is now becoming fashionable. The fact is that foreign investors have been underweight Japan for much of the last twenty years. The change in the interest of foreign money was already evident in 2023, when the influx of foreign investment flows to the Japanese equity market became the largest in ten years. “Japan has benefited from the arrival of global investors who are diversifying their investments in Asia. “Geopolitical tensions and slowing growth have caused a rotation from China to Japan,” says Aneeka Gupta, director of analysis at WisdomTree. An idea in which she agrees with Dan Carter, investment manager at Jupiter AM: “In general, global investors are underweight the market, which means that their outperformance is painful for their portfolios. Part of this underweighting is being corrected. The exodus of shareholders from the Chinese market, until not long ago a favorite destination for global investors, has made capital look for a new home,” she concludes.
The valuation of this market and the business benefits support the bet. “They are trading at 13 times expected earnings (PER), compared to 20 times the US S&P 500. Furthermore, we forecast earnings per share growth for Japanese stocks to be 6.2% in 2024, outperforming all developed markets,” explains Luca Paolini, Pictet strategist. An improvement in business profits that is also supported by the weakness of its currency, the yen, which increases exports. For example, Japanese imports decreased 9.6% annually in January, while its exports grew 11.9%. The yen has lost half of its value against the dollar in the last twenty years, making its economy more competitive and without supporting the unwanted effects of price growth in imported products.
A fact that also highlights the attractiveness of Japan compared to Western markets is the greater diversification in the activity of the companies that make up its main indices (Topix 500 and Nikkei 225), compared to the excessive concentration on technology that Americans suffer.
Despite this, the Japanese economy is in recession, after the last two quarters of last year were negative, despite growing 1.9% for the year as a whole, ceding third place in the world's largest economies to Germany. However, the prospects for 2024 are encouraging and the Bank of Japan itself expects it to end with growth of 1.3%.
There is also a political will to stimulate the stock exchanges, both on the side of companies and local investors. The Government is adopting measures to modernize its business fabric and prioritize the interests of shareholders. “At the end of 2022, a circular was issued urging Japanese companies to return money to owners, either through share buyback programs or the distribution of higher dividends. There has already been an initially strong response from companies, and we hope that the trend will continue,” comments Tedder of Schroders.
Stimuli
Capital Group analysts indicate other initiatives to make listed companies more attractive. “In March 2023, the Tokyo Stock Exchange asked companies to improve profitability, long-term results and valuations. The objective is for the company to generate a return on equity greater than its cost of capital. The different ways to achieve this include reducing excess liquidity on the balance sheet and eliminating less profitable subsidiaries,” they explain.
And the other leg of this stimulus is that the savings of the Japanese go to the market. “Japan is transforming into an asset management-led nation under the leadership of Prime Minister Kishida. In an effort to unlock nearly $14 trillion of household financial assets tied up in cash deposits,” explains Aneeka Gupta. And she adds: “The features of the Nippon Individual Savings Account (NISA) have been reviewed, offering tax advantages and portability. Starting in 2024, the maximum investment amounts allowed in the NISA have been increased and investors can enjoy the tax advantages of the system permanently.”
Therefore, there is a favorable economic, business and political context for the Japanese stock market. And it seems that the honeymoon with investors will last. BlacRock believes that the rally in Japanese equities still has some way to go, unlike other false starts seen in the past. “Both the macroeconomic outlook and the evolution of companies will drive the next upward leg. We believe that the Boj will cautiously withdraw its ultra-loose monetary policy so as not to disturb the exit from decades of deflation and we maintain our overweight in Japanese securities,” he concludes.
Pay attention to salaries
The aging of the population is one of the keys to the Japanese economy, which causes strong tensions in wages due to labor shortages. Negotiations for the 2024 wage increase will conclude in the coming days. Raphael Olszyna-Marzys, economist at J. Safra Sarasin, indicates that the Bank of Japan has placed a lot of emphasis on wages. The phrase “virtuous circle between wages and prices” appears in many of their recent reports, pointing to the possibility that higher wage increases will simultaneously support spending and force companies to raise prices to protect their margins. “This would mark a clear break with the period that began in the late 1990s, when freezing wages and prices became the norm.” And he continues: “Several large companies, such as Asahi Beer, Mizuho and Mitsui Estate, have already announced salary increases of 6% or more.” The more salary, the more purchasing power and the more growth.
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