The enthusiasm for the Japanese market is not a flash in the pan, and investors can always bet on Japan.
A favourable environment
Warren Buffet’s trip to Japan in April alone symbolises the renewed interest of international investors in a country that has been somewhat forgotten for many years. The will of the "Omaha oracle" to increase its investments in Japanese equities has persuaded the most sceptical to retake an interest in Japanese companies. Investment funds that had left Tokyo sometimes for decades have again opened an office in the Japanese capital.
Far from being linked to an irrational fashion effect, these flip-flops are rooted in the country’s evolution. The Japanese economy was reassured at the beginning of the year with a 0.4% increase in GDP in the first quarter. The reopening of borders and ending COVID have boosted tourism and household consumption. While the inflationary slide has upset Japanese consumers accustomed to price stability for decades, it has not weakened domestic demand. At 3.5% in April, Japanese inflation is relatively contained, not to the same extent as in other developed countries.
At the economic level, structural changes within Japanese companies also explain investors’ enthusiasm.
Changes at the heart of the business
The way Japanese companies operate has moved in the right direction in recent years. The steps former Prime Minister Shinzo Abe took to improve corporate governance are beginning to bear fruit. The stock exchange authorities also push listed companies to improve in this area. The Tokyo Stock Exchange would require boards of directors to correctly identify the cost and efficiency of the company’s capital to increase its return.
The regulatory framework’s evolution is moving the lines within the Japanese directorates. Very cautious in risk management and profit distribution, Japanese companies sit on a mountain of cash. Outside the financial sector, they hold in their bank accounts the equivalent of 58% of Japan’s GDP. But under pressure, they begin to reward their shareholders better. The return of inflation, which erodes the value of the cash held, also encourages using this money. The dividend and share buyback envelope will thus reach a record high this year.
Companies are also more generous with their workers. According to a survey of businesses, wages will rise this year like never in three decades. This is partly due to the return of inflation, but above all to the need.
On the road to standardisation
Wage increases relate primarily to those sectors where labour shortages are the most severe, as in services. Fast food chains have increased wages by almost 10%. So it’s often low-skilled, low-wage workers who are getting better incomes. This will support domestic consumption without penalising the international competitiveness of Japanese industry.
As the labour force declines rapidly as the population ages, rising wages will also make it easier to attract foreign workers while curbing the desire of young Japanese people to leave.
Finally, consumption supported by rising wages removes the spectre of deflation that gripped all the economic machinery. Japan would thus once again become a "normal economy" where economic agents do not constantly postpone their decisions until tomorrow in the hope of a more.
This return to normality will require a monetary change and the abandonment of the policy of zero interest rates in the long term. This will also be a healthy development for the Japanese economy.
Free money leads to inefficient allocation of capital. This keeps alive zombie companies that grab market share at the expense of innovative companies.
Essential assets
The changes taking place in Japan make a case for Japanese assets. All the more so since, penalised by the zero rates monetary policy, the yen is undervalued on the foreign exchange market. In concrete terms, Japanese equities are essential in a portfolio properly.
Buy 5% in a defensive or neutral portfolio and up to 10% in a dynamic portfolio. Low Japanese interest rates do not exclude yen bonds. The Japanese currency is a haven appreciated in times of financial crisis. The yen bonds, therefore, usefully reduce a portfolio’s overall risk. They also point to the prospect of a significant exchange rate gain. In parallel with the change in monetary policy and rising interest rates in the Archipelago, the yen should appreciate.
We put 5% bonds in yen, regardless of the profile risk.