Tano adds that the investment case has improved on that from last year. “Against a more benign global macro backdrop, a combination of improving earnings momentum, attractive valuations and favourable supply/demand conditions is conducive to a sustained upturn in the Japanese market.
“Furthermore, from a historical perspective, Japan tends to outperform other global markets when US interest rates are rising,” he says. “This reflects the relatively high weighting of Japanese stocks in economically sensitive sectors, which benefit from a strong or improving US economy, and the impact of a weaker yen on corporate earnings.”
This is all the more attractive with stocks trading in the Topix more favourably valued than their US peers at the moment. They trade on 14 times earnings, compared to 18 times in the S&P 500. Valuations for Japanese equities might appear more favourable than their US counterparts, but investors need to ask if prices in Japan are lower for a reason.
“If I were to play devil’s advocate, I would say that the risks to the downside in the US are lower than those in Japan,” Aviva’s Driver says. “Even prior to the election the US economy was in quite good health, so growth is on a more sustainable path.”
Inflation and rate rises are drivers here. Despite this, Lonergan believes that Japan’s equities are less risky than they have ever been, not only because of valuation, but shareholders now own the assets so they have property rights.
“The pendulum is swinging towards the shareholder and away from some of the traditional concerns that have dominated corporate governance,” he adds.
AN AGE-OLD PROBLEM
Investors intending to increase their exposure to equities trading in Tokyo, and the excess cash on their balance sheets, need to tread carefully.
“While the Japanese market gets a strong tick in the box on the corporate governance front, I would counter that slightly with ongoing risks around the macro environment,” Driver says. The economy has been dogged by almost three decades of deflation, is struggling with an ageing and declining population, a budget deficit and high public debt.
“While there is no doubt that structural reforms and focus on corporate governance is positive and an attraction for investors, it does need to be taken in the context of these ongoing risks around the macro environment,” Driver adds.
The country’s demographic stats and predictions make alarming reading. In 1985 10% of Japan’s population had celebrated their 65th birthday, but by 2015 the figure had risen to more than a quarter (26%). In 2060 it is estimated that 40% of the population will have reached the milestone, AMP Capital claims.
The high cost of providing pensions and medical care worsens with stats showing that the Japanese are making fewer babies. In 2014, one million children were born, 9,000 fewer than in 2013 and was a fourth decline in as many years, according to the ministry of health. This is fuelling fears that the population could fall by 30 million to 97 million in 2050.
Options that the government is exploring to ease the problem of low birth rates and rising longevity include boosting the number of women in the workplace through providing childcare. Pushing the retirement age back and reviewing immigration policy are also happening, as is introducing robots into the workforce, which you will discover if you check in to some hotels in the country.
