Why Japanese stocks are booming
After a 34-year wait the Japanese equity market reached all-time highs in early 2024.
Outside of the US's mega-cap technology sector, Japan has been a shining light for global equity market growth in recent years.
In fact, many investors probably don't appreciate that Japan has been the best-performing developed equity market over the past 18 months - even better than the S&P 500.
Why did the Nikkei go up?
So, what is driving this growth of the Nikkei, and can it continue?
While the long-suffering share market was grinding its way back to levels last seen in 1989, changes were afoot behind the scenes. The Japanese Government looked to remediate the private sector's slow growth and lack of shareholder considerations.
To that end, over a decade ago the government undertook a series of structural reforms of Japan's corporate sector to address these concerns.
As part of the changes, companies were expected to strengthen board independence, enhance shareholder rights, and provide greater disclosure and transparency, among other initiatives to encourage domestic and foreign investors.
These reforms took time but slowly began to spread. Most recently, the Tokyo Stock Exchange weighed in on the task of enhancing corporate value and gave Japanese companies an ultimatum - bring price-to-book rations above one, or risk delisting.
The response has been swift. Record levels of share buybacks and dividends, with dividend growth of 10% p.a. over the past decade. Both activities return value from companies to shareholders. The highest levels of earnings per share growth over the past 10 years (in local currency). And the share market returns to match.
Why investors are following the Japanese markets
Investors have now started to take note. Last year famed investor Warren Buffet increased his stake in several Japanese companies making the country his biggest allocation outside of the US.
January 2024 also went down as the seventh-highest month on record for foreign investments into Japanese stocks.
Beyond government and exchange reforms investors are also hopeful on a number of other fronts for the Japanese equity market.
Geopolitical tensions have led countries to reassess supply chains and Japan has been a key beneficiary. For example, an internal push to regain its position as a global chip powerhouse was bolstered last year by bilateral deals with Europe and the US.
Japan also remains a global leader in robotics with 45% of all industrial robots globally originally designed or produced by Japanese companies. This manufacturing specialisation not only benefits from any trend towards the western economies onshoring manufacturing, but also from the growth in applications for artificial intelligence.
Financial conditions in Japan also remain very accommodative on the back of Bank of Japan (BoJ) policy, which has kept interest rates negative to foster sustainable levels of growth and inflation.
While the normalisation of interest rates above 0% and likely associated currency appreciation are possible risks to the market, looking ahead, Japan appears uniquely placed for future growth.
Projections for 2024 and 2025 earnings per share have fallen across every region in the world, with the sole exception of Japan.
How can Australian investors potentially benefit?
When it comes to a portfolio composition, investors may wish to consider Japanese equities as a meaningful part of an allocation to global equities . Alongside the US, Japan is providing investors with meaningful growth from developed country economies, which investors can access via ASX traded ETFs.
Get stories like this in our newsletters.
