BLOG: Four reasons to invest in Japanese equities
However, reforms in recent years, an improving economy, and the easing of coronavirus restrictions, hint at a brighter future.
Here we look at some of the key reasons to consider investing in Japan – and highlight four funds that can give you exposure.
Four key reasons to invest
1) Improving growth
Having been hit hard by pandemic lockdowns, the country experienced a significant rebound in earnings in 2021 and growth is expected to remain in the high single digits in each of the next three years.
Fidelity International’s Tom Stevenson noted that domestic growth is forecast to be well ahead of trend, while consumption will bounce back after the Covid-related slowdown and political uncertainty. “Demand is also expected to receive a boost from higher capital expenditure, in particular the deployment of digital technologies to mitigate labour shortages,” he added.
2) Recovery in tourism
In 2019, before the pandemic, international visitors to Japan rose to a record 31.9 million. That year, the travel and tourism sector, which also benefitted from China’s tourist boom, added US$359 billion to Japan’s gross domestic product.
A revival in travel demand this year would have a powerful ripple effect, carrying broad economic benefits, according to Christophe Braun, investment director at Capital Group. “It creates the need for a range of goods and services and helps drive jobs growth across a variety of industries,” he said. “Potential beneficiaries include aircraft parts manufacturers, jet engine makers, hotels, and restaurants.”
3) Digital advances
Digital investments in Japan remain low compared to other developed economies such as the US, France and the UK. In fact, according to the OECD, digital investments in Japan have been flat for decades. The country, however, could potentially bridge this gap.
Prime Minister Kishida’s growth strategy has four pillars. The first is innovation, which includes promoting Japan as a science and technology nation and helping start-ups to gain funding.
The second is his ‘Digital Garden City Nation’, which involves the implementation of digital technology such as teleworking, drone delivery and autonomous driving, as well as creating its own ‘Superhighway’ using underwater communications cables to provide access to high-speed, large-capacity digital services anywhere in Japan.
The third pillar is tackling climate change with a focus on clean energy, while the final pillar is enhancing economic security with research and development of cutting-edge technologies such as artificial intelligence and quantum technology, and encouraging semiconductor manufacturers to set up factories in Japan.
4) Green initiatives
As part of the plan to tackle climate change, Japan is currently working towards reducing carbon emissions by 46% by 2030 (from 2013 levels) and achieving carbon neutrality by 2050.
According to the Nikkei, one of its plans would include an estimated ¥2 trillion worth of investments in developing a high-voltage direct current electricity transmission network across Japan over the next 10 years. The electricity transmission network could enable offshore wind power plants to transmit their electricity to large cities efficiently over long distances.
Four Japan funds to consider
AXA Framlington Japan
This fund invests in companies of any size but tends to have a bias to smaller ones. Holdings are chosen based upon analysis of their financial status, quality of management, expected profitability, and prospects for growth. Chisako Hardie, the fund’s lead manager, currently has 94 holdings in the portfolio. The 10 largest include household names such as car manufacturer Toyota, electronics group Sony, and Taiyo Holdings, the chemical manufacturing company.
Baillie Gifford Japan
This investment trust invests mainly in small and medium-sized companies. Manager Matthew Brett says: “Today’s Japanese stock market is well placed to deliver for shareholders. The major index constituents are increasingly technology-focused and Japan’s legendary manufacturing prowess means roughly half of the major global robotics companies are listed there. Additionally, and completely differently from the late 1980s, the overall price of the market does not seem in any way excessive.”
Comgest Growth Japan
The managers of this fund, which invests in high quality long-term growth companies, are upbeat about prospects for the coming year. “We remain optimistic about profit growth across our portfolios in 2022 – even while other firms in our market face more difficult comparisons – and we expect that profit growth to be reflected more broadly in share prices,” they stated.
Rowe Price Japanese Equity
Manager Archibald Ciganer invests in a diversified portfolio of Japanese sectors and companies, aiming to find businesses he believes can deliver sustainable growth, before other investors recognise their potential. He will adapt his investing style as needed to suit changing market conditions, which has helped him to outperform in different environments. Keyence, the electrical appliance supplier, is the largest holding in the fund, followed by the Suzuki Motor Corporation, and Hoshizaki, which makes kitchen and food service equipment.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre