Investors are turning their attention to Japan, which is experiencing accelerating governance reform, strong economic momentum, and sustained inflation, leading some analysts to question whether “Japan’s Rising Sun” will finally live up to its promises. Foreign institutions have purchased the country’s Topix index, which has hit a fresh 33-year high, and the Bank of America has said the Topix could increase by a further 33% to exceed its previous peak.
The change is arguably the biggest practical and psychological shift in the Japanese economy in decades. After years of stagnation, wages are now increasing, and Japan is experiencing sustained inflation with core inflation running at 3.4% annually.
Several geopolitical factors, such as Japan’s hosting of the G7 summit, China-US decoupling, military tensions, bloc formation for a new cold war, and the country’s positioning as a stable and supply-chain friendly partner of the west, as well as its presence as the fourth-largest economy in the world, are contributing to investors’ renewed interest in the country.
The Readers' Portfolio in the Globe Investing Club challenge has increased by 11% since March 13 to mid-May, save compared to the S&P500 and the S&P/TSX Composite Index. Coming in at just 1.1%, the Globe Hot List, comprised of stocks chosen by The Globe's investing team, have had a "lacklustre performance." The Readers' Portfolio stocks, which were chosen based on submissions to The Globe, include Shopify, Microsoft and Nvidia, and no stock has lost money so far.
Investor sentiment towards Japanese equities is shifting as its larger peers, the US and China, face growing headwinds. The Topix index has reached its highest level since 1990, driven by rising inflation, investment by domestic firms and Warren Buffett's endorsement. Experts predict that Japan could see further gains of between 10% and 15%. Investment divisions at Morgan Stanley, Man GLG and JPMorgan Asset Management all expect more upside, while EPFR data reveal that overseas funds have boosted stakeholdings in Japan this month, shifting $15.9bn in April alone.
Foreign buying of Japanese stocks has surged over the past month, with investors buying a net $44bn worth of securities since the beginning of April. Investors are now questioning whether this is the start of a new bull market. Goldman Sachs recently suggested that Japan is nearing a once-in-a-decade bull market. Warren Buffet, who recently increased his investment in Japan’s five largest trading houses, is also proceeding with caution as he considers adding to his investments. Although he views Japan as a safe place to put money, it might not necessarily mean a sustained bull market. The current froth in the market could fall if the Bank of Japan (BoJ) ever undertakes normalization, as Japan’s demographic problems and rapidly shrinking workforce will cause multiple challenges, particularly to tech and auto giants.
The Topix index in Japan is at a 30-year high and experts are pointing to three causes for what they describe as "the Japan rally". The first factor is a change in corporate attitudes towards shareholders and activism that is swinging opinion in favour of changes such as increased return on equity. Many activists are targeting capital-inefficient companies, including those with price-to-book ratios below 1. The second factor is a rise in Japanese inflation that is seen as an end to the country's long-standing deflation problem. The third reason is the falling appeal of Chinese markets. Some investors who might have looked to China are instead turning to Japan for Asia exposure, a stand-off between China's government and Big Tech having made some corporate managers ill at ease. Critics says these cheers should be tempered by concerns over cyclical weakness elsewhere and the possibility of corporate disquiet.
Japan's benchmark stock index, the Nikkei 225, has hit a 33-year high but technical analysts believe an overbought market and currency distortions make it a risky buy for investors. The index has been rallying this year, leading investors to suggest Japan is outpacing the rest of the world, but the market's historic difficulties rising above the 1989 peak mean the currency may remain the fundamental point of concern. However, a combination of "stronger GDP growth, higher inflation, negative interest rates and the weak yen" will aid Japanese risk assets if the Bank of Japan ends bond yield caps, but keeps interest rates low to stimulate inflation to reach its 2% target, according to Syed Mansoor Mohi-Uddin, chief economist of the Bank of Singapore. He adds: "the BOJ's dovish stance on interest rates is likely to keep supporting risk assets this year in Japan".
Activist investors are submitting record numbers of shareholder proposals for Japanese companies as Tokyo Stock Exchange pushes for better valuations. The number of proposals submitted for this year’s shareholder meetings has risen 60% from last year. Investors including Aya Murakami and Oasis Management’s Seth Fischer say the Tokyo Stock Exchange’s campaign to improve valuations is serving as a tailwind for their own efforts. Bourse operator Japan Exchange Group announced in January that it will urge companies that trade below book value to release plans to boost share pricing. The Topix index, Japan’s benchmark equity index, is at its highest since 1990.
