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Japan’s Reopened Borders, Weak Yen And Undervalued Stocks – Buying Opportunity
Katsunori Ogawa
31 October 2022
While some countries have caught a lot of headlines over recent weeks – such as the UK – the plight of the Japanese yen against the dollar hasn’t taken place under bright lights. And yet the state of the Japanese economy ought to be more in focus by wealth managers than it is. Some of its long-standing issues, such as an ageing workforce, attempts to climb from a multi-decade period of deflation, are highly instructive for the rest of the world. The country also shows resilience – testimony to a strong civil society and a level of social cohesion that some might envy. This will be a boon to Japanese industries that are in need of foreign investment and will open up buying opportunity for investors.
To explore the outlook for the Japanese economy and business sector, and to work out some ideas, is Katsunori Ogawa, portfolio manager of the Sakigake High Alpha fund at . The editorial team is pleased to share these views and urges readers to jump into the conversation. The usual disclaimers apply. Email tom.burroughes@wealthbriefing.com
From early 2020 Japan imposed restrictions on foreign tourists. On 11 October this all changed. For the first time in over two years, Japan’s borders are fully open: various travel restrictions are eliminated. Quarantine, waiting times and short-term visas are now a thing of the past. Individual travel is once again permitted. This provides a valuable opportunity for Japanese businesses and also for investors.
There are industries that stand to benefit directly from increased footfall – hospitality, consumer electrical goods, leisure, and transport. Many other businesses also stand to benefit, albeit it in a more indirect way as open borders lead to investment from foreign buyers. Overseas investors in Japan have long placed emphasis on getting to know a company, through in-person visits, before buying. As borders reopen, an influx of foreign investors seeking to take advantage of a weak yen will not be far behind.
As tourists return, some leisure stocks such as theme parks and transportation, which were hit the hardest by the pandemic, should see a significant upturn. Retail should follow the same trajectory: Japan’s attractions to foreign tourists remain, boosted by a weak yen.
Given all this Japanese stocks are currently undervalued. Downside potential is limited, and the nation is so far avoiding the recessionary pressures affecting many developed economies. The weak yen is a strong tailwind to these undervalued companies. The price to earnings ratio (P/E ratio) of Japanese companies currently sits in the 12 times range; this is below the 10-year average of 16x and the price to book ratio (P/B ratio) is in the 1.1x range.
Unlike in the US and Europe, where skyrocketing interest rates and inflation are squeezing businesses, Japan’s path to economic recovery is clearer. Investors stand to gain from the exchange rate when stocks rebound, so bottoming out of the market should be followed by a recovery trend, fuelled by foreign investor buybacks and additional purchases.
Companies set to benefit from a weak yen and a return of inbound tourists include MatsukiYo CoCokara & Company (3088) an operator of a pharmacy chain, Isetan Mitsukoshi Holdings (3099) an operator of department stores, and Shiseido (4911) a cosmetics producer. Isetan are popular amongst tourists for their quality Japanese goods and stand to benefit from increased in footfall. Shiseido, a large exporter of high-end cosmetics, will benefit from a weak yen boosting overseas sales. There are also promising prospects in leisure-related businesses such as Tokai Railway Company (9022) the operator of the Bullet Train, and Oriental Land (4661) which operates the Tokyo Disney resort.
Despite all this, Japan’s business horizon is not free of clouds. Although hospitality too stands to benefit from increased footfall the industry faces its own unique challenges, as in the west, staff vacancies in hospitality are high. To compound this, domestic demand is low. These businesses are apt to remain troubled in the months to come despite newly reopened borders.
In addition, China is so important to Japanese tourism that until China reopens too Japan will not get back to a pre-Covid-19 situation. Before Covid-19, the Japanese tourism industry was dominated by Chinese visitors; they accounted for a third of total foreign visitors in 2019. As China is still operating heavily restricted borders, Japan does not stand to benefit in full from open borders until its neighbour follows suit.
In addition, as the global economy is in decline, cyclical sectors such as materials are likely to be the first hit by bearish business sentiment. Soaring energy prices and import costs, driven by a weak yen, are tightening margins for many businesses. This squeeze is growing ever worse as the divergence in monetary policy between the Federal Reserve and Bank of Japan continues to widen. Domestic demand, essential to bullet-proofing the Japanese economy against further shocks, is still lacking.
Until these problems are solved and Chinese tourists return, Japan will not realise its full investment potential in all industries. However, for most sectors, the current perfect storm of undervalued stock prices, a cheap yen and the restored ability of investors to visit the country presents a significant buying opportunity.