# Why Japan’s equity market will continue to rise (LON:FJV)

- Link: https://www.directorstalkinterviews.com/why-japan%e2%80%99s-equity-market-will-continue-to-rise-lonfjv/4121146732
- Published: 2024-03-11T12:58:10+00:00
- Author: Ethan Davis

**[Fidelity Japan Trust plc](https://www.directorstalkinterviews.com/company/fidelity-japan-trust/fjv.l)**(
[LON:FJV](https://www.directorstalkinterviews.com/company/fidelity-japan-trust/fjv.l))
is well positioned as Japanese stocks reached an all-time high for the first time
since December 1989  overnight^(1). The Nikkei 225 has been on a sustained upward
trajectory for over a year, supported by a number of factors including corporate
governance reforms and a normalising economy. Despite the strong recent returns,**
Jeremy Osborne, Investment Director of Fidelity Japan Trust PLC**, thinks Japanese
equities still offer compelling value and investors are underexposed to the market.

**Nikkei 225 Index passes December 1989 peak**

![Nikkei 225 Index passes December 1989 peak](https://www.directorstalkinterviews.
com/wp-content/uploads/2024/03/Nikkei-225-Index-passes-December-1989-peak.png "Why
Japan’s equity market will continue to rise (LON:FJV) (FJV)")

Source: Bloomberg as of 22 February 2024. **Past performance is not a reliable indicator
of future returns. Returns may increase or decrease as a result of currency fluctuations.**

| **PAST PERFORMANCE** | 
|   | Jan 19 – Jan 20 | Jan 20 – Jan 21 | Jan 21 – Jan 22 | Jan 22 – Jan 23 | Jan 23- Jan 24 | 
| Nikkei 225 Index | 11.93% | 18.47% | -9.23% | -2.28% | 14.21% | 
|  |  |  |  |  |  | 
| **Past performance is not a reliable indicator of future returns.** Source: RIMES as at 31.01.2024 | 
|   |

**Japanese stocks power ahead year to date, continuing on from 2023**

The strong performance of Japanese equities since last year has been supported by
several key supports. Chief among them are the country’s shift towards moderate 
inflation, corporate governance reforms enacted by the Tokyo Stock Exchange (TSE),
the Bank of Japan’s accommodative policy stance and accompanying weakness in the
yen, and renewed buying among overseas investors. There is also a sense that investors
are favouring Japan for its relative stability compared to other markets, which 
has contributed to the direction of flows.

“More recently, corporate governance reforms have gained further momentum with the
TSE’s publication of companies that have complied with its call to disclose plans
aimed at improving capital efficiency. So far, 49% of Prime market companies and
19% of Standard market ones have responded to the TSE^(2).

“Upbeat earnings results, including from index heavyweights, accompanied by share
buyback announcements have also served to galvanise market sentiment. And the broader
shift in the economy to moderate inflation supports growth in wages and consumer
spending, and investment.

“The major active buyers in the Japanese market have been overseas investors year-
to-date, with net buying concentrated in cash equities rather than futures, which
suggests increased interest among traditional long-only investors. With Japanese
companies remaining proactive in share buybacks, domestic corporations have been
the other key buyers in the market.

**We believe Japanese stocks are not excessively priced despite reaching an all-
time high,**

“Japanese equities traded on a forward price-to-earnings (PE) multiple north of 
50x during the bubble period, so the current multiple of around 15x^(3) does not
look expensive historically nor relative to other markets^(4), especially considering
current interest rates.

![Japanese equities Performance](https://www.directorstalkinterviews.com/wp-content/
uploads/2024/03/Japanese-equities.png "Why Japan’s equity market will continue to
rise (LON:FJV) (FJV)")

Source (1) Factset, compiled by Daiwa Securities as of 8 February 2024. (2) Bloomberg
as of 9 February 2024.

“Moreover, a sustained improvement in returns on equity (RoE) would support a higher
price-to-book (PB) multiple, and the economic trend towards moderate inflation supports
higher earnings-based valuations. The TSE has also taken an important step with 
its guidance on how companies should be managed around governance and capital allocation,
and this directly encourages executives to make decisions that are conscious of 
stock prices.

“As well as concrete measures to foster sustainable growth such as returns that 
exceed the cost of capital, the TSE also promotes essential initiatives such as 
research and development (R&D), human and capital investment, and realigning business
portfolios to better allocate resources.

Since the 1990s, Japan has been battling with deflation, which made it difficult
for corporations to invest for the future. However, in the current environment where
we are becoming increasingly confident about overcoming deflation, companies are
more likely to accept the TSE’s requests and engage in strategies that are conscious
of capital allocation and stock prices.

“In this environment, we believe companies are increasingly embracing stock price
indicators such as PB and RoE as a barometer of performance, and as Japanese corporations
progress, these indicators could be valued as highly as they are in Europe and the
US.

**Both overseas and domestic investors remain underinvested in Japanese stocks**

“Cumulative net buying by overseas investors remains well below the 2015 peak witnessed
during the era of ‘Abenomics’, which was characterised by the growth-led approach
of loose monetary policy, fiscal stimulus and structural reforms. Although we have
seen renewed buying since March 2023^(5), global active funds remain net underweight
in Japan, albeit less so than they were during the Covid-19 outbreak.

“Japanese households are also relatively underweight equities when it comes to their
mix of financial assets compared to their counterparts in the US or Europe^(6). 
Domestic stocks account for only 11% of their financial assets^(7), but it is likely
that this will rise as households shift from cash deposits to inflationary assets
such as stocks, driven by inflation and the expansion of the Nippon Individual Savings
Account (NISA), which is a tax-exempt investment scheme originally modelled on the
UK’s ISA.

“These significant structural underweights in investor portfolios suggest there 
is ample room for inflows into Japan’s markets. If the corporate sector, guided 
by more shareholder-friendly policymaking, can continue to build on its success 
in recent years in boosting returns, then inflows could persist.

**Shift to moderate inflation and progress in reforms supports Japan’s longer-term
outlook**

“The biggest risk to Japan’s equity market is a return to deflation – but we believe
the chances of this are low. There are risks around inflation and how rising interest
rates can impact market valuations, but the likelihood is that in Japan any increase
in rates will be gradual.

“Ongoing signs of weakness in China’s recovery and a slowdown in the US also present
potential headwinds that could prompt a near-term adjustment in Japanese stocks.
Additional shocks from energy prices, driven by an escalation in geopolitical events,
remain a risk that we are closely monitoring, although this is likely to be a global
headwind rather than isolated to Japan.

“Despite the presence of various external risk factors, we believe that Japan’s 
shift to moderate inflation and its impact on spending and investment decisions 
by households and corporates, combined with steady progress in governance reforms
and light positioning among investors, support the longer-term outlook of the Japanese
stock market.”

 1. Source: Bloomberg as of 22 February 2024.
 2. Source: Tokyo Stock Exchange, January 2024.
 3. Source: Factset, compiled by Daiwa Securities as of 8 February 2024.
 4. Source: Bloomberg as of 9 February 2024.
 5. Source: Ministry of Finance; compiled by Daiwa Securities as of 31 January 2024.
 6. Source: Bank of Japan, as of August 2023.
 7. Source: EPFR, Refinitiv DataStream. Data: January 2002 to December 2023. Note: 
    Percentage of Japanese stocks in actively managed equity funds (including ETFs)
    that invest globally, excluding the U.S., compared with the MSCI EAFE Index. The
    fund’s weighting is calculated as an asset-weighted average.

**Important information**

Past performance is not a guide to future returns. The value of investments and 
the income from them can go down as well as up, so you may get back less than you
invest. Fidelity Japan Trust PLC invests more heavily than others in smaller companies,
which can carry a higher risk because their share prices may be more volatile than
those of larger companies and the securities are often less liquid. Changes in currency
exchange rates may affect the value of investments in overseas markets. The shares
in the investment trust are listed on the London Stock Exchange and their price 
is affected by supply and demand. This investment trust can gain additional exposure
to the market, known as gearing, potentially increasing volatility. This information
is not a personal recommendation for any particular investment. If you are unsure
about the suitability of an investment you should speak to an authorised financial
adviser. Investors should note that the views expressed may no longer be current
and may have already been acted upon.

The latest annual reports, key information document (KID) and factsheets can be 
obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10.
The full prospectus may also be obtained from Fidelity. The Alternative Investment
Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK)
Limited. Issued by FIL Investment Services (UK) Limited, authorised and regulated
by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity
International logo and F symbol are trademarks of FIL Limited. UKM00224/386280/ 
ISSCSO00154/NA

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