Analysts believe the country has turned a corner with an end to deflation potentially on the horizon and corporate governance reforms starting to have an impact.
Investment experts are painting a relatively bright picture of the Japanese market, despite the country’s ailing currency.
After decades of economic discomfort, Japan seems to be welcoming inflation. This, coupled with corporate governance reforms, has led to structural changes that focus on efficiency and profitability, meaning companies are returning more value than ever.
According to Asset Management One, a leading Japanese investment firm, with $453bn under management globally, 59 per cent of Tokyo-listed companies are now working to improve capital efficiency, up 10 per cent since the end of 2023.
Japan, a wealthy country with a high savings rate and an ageing and shrinking population, is turning a corner according to leading analysts. “Japan presents important opportunities for both wealth management and investment – both Japanese investors investing in the rest of the world, and non-residents are increasingly interested in putting money to work in Japan itself,” says Arnab Das, global market strategist at Invesco.
“The Nikkei should continue to do well as long as Japan continues to emerge from deflation – a process that has begun and seems to have more legs than previous false starts.”
But the exit from deflation is not a given, by any means, given the structural downward pressures on nominal growth from demographics, he believes. “These doubts are reasons for the Bank of Japan (BoJ) to go very slowly, which itself is reflationary and hence bullish for Japanese assets, especially stocks and real estate,” says Mr Das.
In March, the BoJ ended an eight-year cycle of negative interest rates, citing that its 2 per cent inflation target is on the horizon. Japan’s era of deflation began in the 1990s, known as ‘The Lost Decade’, mainly due to the bursting of the bubble economy.
“The key is to make Japan an attractive place for residents and foreigners – people and firms – to spend and invest. And that is indeed what seems to be happening, at least to some degree, a higher degree than for many years if not decades,” Mr Das explains.
At Pictet Asset Management, Sam Perry, senior investment manager of Japanese equities, also believes structural change will provide renewed opportunities in Japan. “The 12 years of governance reforms are seeing record high dividends and share buybacks together with companies having a new explicit focus on return on capital,” he says.
“The exit from deflation and presence of persistent moderate inflation will stimulate investment and spending by the corporate sector and encourage investment by retail investors,” he adds.
Robotic leaders
Japan is generally considered a world-leader in many areas of technology, including robotics, automotive and use of technology in services, including social and health care. According to the International Federation of Robotics, Japan is the world’s number one industrial robot manufacturer.
“Robotics in personal care are being developed and tested in Japan,” says Invesco’s Mr Das. “As the world starts to catch up to Japan in the demographic transition, such firms could become major players in an ever-expanding global market, where many other technologies and traditional services could become harder to get,” he believes.
Japanese car manufacturers were also the first to lead the way in hybrids and electric vehicles (EVs). Almost 15 years ago, Nissan was the first automaker to offer a mass-produced car that ran on batteries alone. But Japan failed to cement its place in the EV world. According to Drive Electric, an electric vehicle leasing specialist, China is still leading the EV race.
Yet hope remains for this sector, according to Mr Das. “Some Japanese car firms are leading the way in development of radical alternative battery technologies, which, if they bear fruit, could transform the EV landscape with far longer range and faster recharging,” he says.
Tokyo under scrutiny
Japan has only limited ability to confront the challenges it faces. The country is highly exposed to geopolitical risks, both within the north Asia region and to US political risk, according to Invesco’s Mr Das. He believes the weak yen could come under scrutiny, should Donald Trump be re-elected. “He and his advisers, such as Robert Lighthizer, would like a weaker dollar to support re-industrialisation.”
Mr Trump may consider trying to push other countries, especially allies, to “re-evaluate their own currencies” and could do so via the “bully pulpit”.
According to Mr Das, such an effort or even talk of it could help drive the yen stronger, Japanese government bond yields lower, and put some pressure on the Nikkei, given the potential earnings impact and risk of importing disinflationary pressure.
