Japan’s renaissance steers equities overweight

Japan’s renaissance steers equities overweight

Since May of this year we have been overweight to Japanese equities, encouraged to increase our exposure by improving corporate governance dynamics that have supported a step change in share buybacks and dividend payments.

This turn of events is the legacy of the late Shinzo Abe, Japan’s Prime Minister from 2006 to 2007 and again from 2012 to 2020. Reforms that he instigated, which came to be widely known as ‘Abenomics’, sought to improve Japanese corporate profitability and capital efficiency. Now, a year on from his assassination, signs of fruition are emerging with capital efficiency improvements increasing the returns generated on investors’ equity.

 

In perhaps a fitting legacy, reforms continue. In April of this year, another policy move aimed at increasing Japanese corporate profitability was launched; Action Plan for Substantiation of Corporate Governance Reform1. Key within this is the Tokyo Stock Exchange’s requirement for firms to disclose risk-taking plans and measures taken to achieve growth while keeping profitability in mind. In particular, firms with a price-to-book (P/B) ratio below 1x will be flagged and requested to “properly identify” their cost and efficiency of capital.

Japanese P/B per RoE premium to global peers

Japanese P/B per RoE premium to global peers

Source: Bloomberg, 9 August 2023

As at the end of July, Japanese equities had rallied almost 16% since this announcement, outpacing global equities in local terms by 5%2. Naturally, questions have emerged around whether the potential upside is now factored into prices. We note that the premium in terms of P/B per unit of return on equity (RoE) of Japanese stocks versus non-US global peers has increased. However, it has only moved to the extent that a 0.5% increase in RoE would shift this back to median levels. Our Global equity team have flagged that the magnitude of cash on some Japanese firms’ balance sheets provides clear opportunities to increase RoE by around 5%. As such, we do not view the prevailing Japanese rally as overextended.

Supportive tailwinds

Aside from the long-term reform-driven upside for Japanese equities, we also see medium-term tailwinds from both the domestic and external environment. On the domestic front, lingering Covid-19 restrictions into 2022 set a low starting point for activity, relative to other regions. Today, consumer confidence has recovered, household balance sheets are healthy and domestic consumption still has room to improve before it reaches pre-Covid levels. The scope for Japan’s tourism industry to continue improving, relative to 2019 levels, is also notable.

 

From an external perspective, the case can be made for an upcoming period characterised by a change to the typical inverse Japanese yen and Japanese earnings relationship. Increased non-Bank of Japan key developed market central bank rates have reduced global-growth expectations and associated cyclical Japanese earnings expectations, while depreciating the yen through increased rate differentials. From here, with rate differentials expected to gradually reduce from both sides, alongside a potential bottoming of the global cycle, the case can be made for an appreciation in the yen alongside an increase in Japanese earnings. This provides an attractive set-up for non-yen-based investors such as us.

 

In a globalised world where tying regional equity market performance to regional economic outcomes can be difficult, a unique set of catalysts should specifically benefit Japan-listed companies.

1 Japan Financial Services Agency, Action Program for Accelerating Corporate Governance Reform: From Form to Substance, 26 April 2023
2 Source: Bloomberg, 9 August 2023
Keith Balmer
Portfolio Manager
Share on linkedin
Share on email
Risk disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle.

You might be interested in...

26 February 2024

Low inflation to create unusual dilemma for the Bank of England

In an election year, pressure for a cut in rates will only grow as inflation eases. What is the BoE to do?
Watch time - 4 min
19 February 2024

UK recession: what next?

Why an upturn looks likely and what that could mean for markets.
Watch time - 4 min
12 February 2024

How far will interest rates fall?

Discussing the extent of cuts and the implications for markets?
Watch time - 4 min

Why Columbia Threadneedle for low-cost multi-asset

Columbia Threadneedle Universal MAP redefines value through active multi-asset solutions and business support at a passive price point. Fund OCFs at 0.29%-0.39%.

Our Portfolio

The Columbia Threadneedle Universal MAP and Sustainable MAP ranges offer risk-controlled portfolio options designed to cover a host of client growth, income and sustainability needs.

Important information

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

For professional investors only.

This financial promotion is issued for marketing and information purposes only by Columbia Threadneedle Investments in the UK.

The Fund is a sub fund of Columbia Threadneedle (UK) ICVC III, an open ended investment company (OEIC), registered in the UK and authorised by the Financial Conduct Authority (FCA).

English language copies of the Fund’s Prospectus, summarised investor rights, English language copies of the key investor information document (KIID) can be obtained from Columbia Threadneedle Investments, Exchange House, Primrose Street, London EC2A 2NY, telephone: Client Services on 0044 (0)20 7011 4444, email: [email protected] or electronically at www.columbiathreadneedle.com. Please read the Prospectus before taking any investment decision.

The information provided in the marketing material does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. The manager has the right to terminate the arrangements made for marketing.

Financial promotions are issued for marketing and information purposes; in the United Kingdom by Columbia Threadneedle Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EEA by Columbia Threadneedle Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited. In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium