Another investment house says that the case for owning Japanese equities should not be ignored.

Japanese equities remain relatively cheap when set against global peers, even though the shift into “unloved” and more cyclical stocks has pushed the country’s stock market to the highest point in three decades, according to Eastspring Investments.

The country’s businesses have restructured – aided by corporate governance reforms – and their balance sheets are in good shape when set against international rivals. The COVID-19 crisis has accelerated how firms have shaken up their operations, Dean Cashman, portfolio manager at Eastspring, writes in a note.

Profit margins in Japanese firms are on a rising trend, while companies’ willingness to improve management techniques have put the country in good shape, he wrote. 

Cashman is not the only investment figure to laud Japan’s potential. Union Bancaire Privée, the Swiss private bank, has said much the same thing, also citing reforms to Japanese corporate governance as a factor. In 2014 and 2015, Japan introduced new stewardship and corporate governance codes, respectively, and it is revising such measures this year. The country is also changing stock market listing rules and tightening governance standards on large-cap stocks. One result is that firms are paying out more to shareholders and it is becoming easier for disgruntled investors to oust underperforming bosses.

“Cash-rich Japanese companies have begun to demonstrate more alignment with shareholder interests. Not only are dividend pay-outs on the rise, 2019 was a record year for stock buybacks; Topix buybacks rose 109 per cent year-on-year. While activity was impacted in 2020, buybacks still exceeded 2018 levels,” Cashman wrote. “Cheap valuations amidst a loose fiscal and monetary policy environment also offer many cash-rich companies with robust balance sheet health the ability to fund their future investment requirements.”

“The general perception of the market is that Japan is characterized by its aging demographics as well as a low growth, low inflation and low interest rate environment. But a key point to note is that Japanese corporates have remained resilient despite the pandemic; there are many companies with mispriced but good quality income streams that remain out of favour with the market,” Cashman added.

Japanese equities vs global peers:

Source: Eastspring Investments, Refinitiv Datastream. Data as of 30 April 2021. MSCI World = MSCI AC World Index.