Japan, the land of the rising sun, might soon be back on investors’ horizons, with several factors coming into play that might make them want to reassess their outlook on and exposure to Japanese equities.
The first is somewhat obvious: the Japanese market remains relatively cheap, and as a result, there has been a pickup in mergers & acquisitions activity over the last few years as private equity turned its eye on listed counters in Japan.
There has been a notable uptick in deal volume, with private equity deals increasing by 22% in 2022 and 63% in 2023. Like most global equity markets, Japan has stood in the shadow of the US, led by the Magnificent 7 over the past few years. US equities reached historically high levels of concentration in global indices, creating wide valuation spreads between US equities and those of other international equity markets, including Japan.
Of course, the doyen of value investing has been wise to this for a while. Warren Buffett scooped up large stakes in some of Japan’s biggest conglomerates in peak Covid times in August 2020. That the greatest investor of all time is buying big into Japanese equities alone should be a signal to retail investors to start looking at Japan again. The Berkshire Hathaway series of trades has netted the firm a few billion dollars in profit since 2020. Today, the portfolio spins off just more than $800m in dividends annually, giving it a dividend yield of just under 6% for its Japanese equity portfolio.
Buffett cleverly financed the trades through yen-denominated bonds issued at rates under 2% fixed for 40 years, effectively locking in an annual arbitrage profit of about 4%, without the currency risk to boot. As recently as last month, Buffett indicated he would increase his stakes in the five conglomerates. Investors might take that as a signal that he still views Japanese equities as offering value, even if retail investors may have missed the first move up.
The second and less obvious sign that investors should relook at Japanese equities is that the Tokyo Stock Exchange has launched several programmes over the past few years to improve capital allocation and corporate governance at listed companies. It has engaged with companies about the hefty price-to-book discounts frequently seen when looking at Japanese balance sheets. This push by the exchange has resulted in a significant increase in corporate buybacks, with 2024 showing the highest level of corporate buybacks in almost a decade.
There has been a notable pickup in dividends paid out to investors, with the payout ratio across the market rising from 57% in 2003 to 67% in 2004. We have also seen wide-ranging programmes to divest noncore assets and return capital to shareholders, or to plug capital into more core growth areas of the business. Just look at Mitsubishi Corp, whose price-to-book went from 0.78 to 1.1 after conducting a ¥400bn buyback programme and committing to return ¥1.5-trillion in capital over three years up to March 2025.
Similarly, Toyota has announced a raft of asset sales to funnel capital from noncore businesses into growth areas. Some of the actions being taken to encourage change at listed companies are usually associated with activist funds and investors. Though an unorthodox approach, it has had the desired results, and it seems the exchange will continue pushing ahead with its various programmes.
It wouldn’t surprise me to see Japanese industry as a net beneficiary of trade wars between the US and China
Third, in the highly fluid and dynamic macroeconomic and geopolitical context the world is entering due to the Trump administration, investors must remember Japan’s huge manufacturing and technological capability. With China facing tariffs, could Japanese hi-tech manufacturing be poised to enter the breach as a friendly allied equipment producer for the West? Japan is still one of the largest economies in the world, with notable brand names, including Toyota, Nintendo and Sony. Given the latent capability within the Japanese economy, it wouldn’t surprise me to see Japanese industry as a net beneficiary of trade wars between the US and China.
South African-based investors may have limited options for accessing Japanese equities directly. Still, those who operate with a full-service broker will find a way to access the particular Japanese security of their choice. For the rest, Sygnia offers the MSCI Japan exchange traded fund listed on the JSE. The latest fact sheet shows it has delivered 9.2% annualised for the past decade. That return has beaten the FTSE 100, Euro Stoxx 50 and the JSE top 40 index over the same period, which might surprise many globally inclined local investors.
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