The Japan stock market has not been an exciting investment destination since the property bubble burst back in 1990. The main reasons for the lackluster performance were persistent deflation, a declining population and corporate management that was not particularly shareholder-friendly in many cases.
RISING RETURNS
However, key changes for shareholders were made during Shinzo Abe’s time as Prime Minister starting in 2013, including the new Stewardship Code and Governance Code for institutional investors and corporate management to improve accountability towards shareholders. Japan’s largest pension fund, Government Pension Investment Fund (GPIF), as well as the Bank of Japan, have also become significant investors in the stock market since then. The Tokyo Stock Exchange has also taken steps to push companies to improve governance, including the latest initiative in 2023 to ask companies trading below book value to make plans to improve corporate value. Together with the increasing presence of activist funds in Japan, corporate governance and shareholder returns have improved by leaps and bounds in the past few years. Japanese corporates are now expected to deliver the highest-ever dividends and share buybacks for the fiscal year 2022.
DEFLATION TO INFLATION
Another factor that held back Japan was persistent deflation. However, with inflation now rampaging around the world, inflation has finally caught up in Japan. In particular, wages are now finally rising to catch up with inflation in Japan, with the latest spring wage negotiations poised to deliver the highest wage hikes since the 1990s. The Bank of Japan may also finally end its ultra-easy monetary policies in response to the sustained inflation and expected wage hikes. These events may finally trigger a sea change in the cautious mindsets of consumers and corporates alike in Japan, and pent-up demand may be unleashed. With the expected resumption of inbound tourism growth with the post-COVID re-opening, consumer spending may finally be on a sustainable growth path.
AUTOMATION FORERUNNER
The final factor holding back Japan is its declining population, a structural problem that is not easily resolved. However, this is a developed country problem that is now faced by many countries, including most recently, China. Beyond an influx of foreign workers that can alleviate this problem, countries need to use their human resource more efficiently. Japan companies are already relooking at their labour practices, including the adoption of merit-based wages and global recruitment. From an investment viewpoint, the top Japanese companies are mostly global companies, which means the demographic problem in Japan is not a key factor for investment. That said, Japanese companies are forerunners in industrial automation, a key area to address manpower shortage and productivity issues globally.
LIONGLOBAL JAPAN FUND
The LionGlobal Japan Fund focuses on globally-competitive companies that can ride on structural growth trends and companies that can grow through value-added products and services. Structural growth themes include factory automation and digitalization that enhance productivity, as well as solutions and products that contribute to sustainability and environmental protection. Technology and healthcare are also areas of structural growth and advancement. Domestic consumption may embark on a sustainable growth path and become an investment theme as well.
Footnote: All data are sourced from Lion Global Investors and Bloomberg as at 18 April 2023 unless otherwise stated.
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