Japan’s stock market has waited more than three decades for its moment in the sun. Since the wobbles caused by the banking sector shocks in March, the Japanese stock market has bounced to near all-time highs.
Japanese stocks have also benefited from relatively ‘cheap’ valuations, a long-awaited return of inflation and a weakening currency. All these factors combined have led to the Nikkei 225 surpassing 33,000, its highest level since 1990. Please remember past performance isn’t a guide to the future.
An endorsement from one of the world’s best ever investors, Warren Buffett, didn’t hurt either. Buffett has held a soft spot for Japan for many years, given many Japanese companies show traits and characteristics that define his favoured investment approach – value investing.
Value investing – 3 share ideas ready to bounce back?
Buffett ventured in to Japan in April, reconfirming that he saw value in the Japanese stock market – this acted as a catalyst for others to join him.
In May 2023 alone, investors bought over $15bn worth of Japanese stocks, the highest monthly amount since October 2017. But investors must tread carefully here as these sharp movements raise questions around whether this is just a momentum trade or if a potential ‘bubble’ could be down the line.
That said, there are many other factors behind the stock market’s recent bounce back.
What else is driving the Japanese market?
Changes to the Tokyo Stock Exchange have seen Japan’s largest overhaul of equity markets for over a decade, raising the overall governance standards of listed Japanese companies.
These changes will place a stronger focus on shareholder returns. This could lead to companies being viewed more positively by investors and attracting foreign investment.
Japan is also considered an outlier compared to most other major economies globally due to its stance on inflation and interest rates. While global economies have been fighting soaring inflation, Japan has welcomed it following years of deflation.
The Bank of Japan has kept interest rates below zero, while other central banks are hiking rates at record speeds. This means that borrowing costs for Japanese businesses are still cheap, which could help spur growth. But it also means Japan has continued with its ultra-loose monetary policy. Another supporter of growth.
Companies have started to increase prices for the first time in decades and Japan’s GDP (gross domestic product) grew 0.4% in the first quarter of 2023.
While these decisions have helped the economy so far, the Yen has weakened. This has made imports more expensive, but a weaker currency has buoyed exports. It’s made Japanese goods relatively cheaper on the world market, a particular boon for a major exporting nation like Japan.
The Japanese stock market is attractively valued. We think some parts of the market are misunderstood and under researched, meaning there could be some interesting opportunities and hidden gems for investors.
This article isn’t personal advice or a recommendation to invest. All investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure an investment is right for you, ask for financial advice.
How to invest in Japan – 3 fund ideas
Active funds are a good way to invest. They’re run by a professional investment manager who will try to beat a certain index, instead of simply tracking it. While there’s potential for the fund to perform better than the index over the long run, the reverse can also be true.
Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, they understand the specific risks of the fund before they invest and make sure any new investment forms part of a diversified portfolio invested for the long term (5 years+).
For more information on these funds including their risks and charges, please take a look at the key investor information and online factsheets linked below.
FSSA Japan Focus
This active fund invests in companies that are dominant in their industries. The managers believe the strength and quality of the companies they own is what drives returns over the long run.
They tend to invest in relatively few companies which adds risk. Almost two thirds of the fund is invested in technology, industrials and consumer staples companies. This can change over time, depending on where they find what they believe to be the best opportunities.
MORE ABOUT FSSA JAPAN FOCUS, INCLUDING CHARGES
FSSA JAPAN FOCUS KEY INVESTOR INFORMATION
Man GLG Japan CoreAlpha
Jeff Atherton and his team invest in companies they feel can be bought at a lower price than their true worth, and sell them when they feel the company and the share price has recovered. It’s a style known as value investing.
Remember though, not all these companies are guaranteed to make a recovery. Their discipline in this approach sets them apart from their peers.
This active fund invests in a relatively small number of companies. That means each one can have a significant impact on how the fund performs, which adds risk. While this can increase the fund’s performance potential, it is a higher-risk approach.
MORE ABOUT MAN GLG JAPAN COREALPHA, INCLUDING CHARGES
MAN GLG JAPAN COREALPHA KEY INVESTOR INFORMATION
Tracker funds (or passive funds) are the opposite to active funds and can be a great way to get diverse and low-cost access to a certain market, like Japan. They aim to track the performance of a stock market index, instead of trying to beat it.
iShares Japan Equity Index
This fund aims to match the performance of the FTSE Japan – a broad index of more than 500 companies. These are selected by FTSE as a representation of large and medium-sized companies in Japan. The fund invests in every company in the FTSE Japan index in order to track it as closely as possible.
While it invests more in larger companies, it can invest in higher-risk smaller companies too. It also invests in a range of different sectors, including industrials, consumer discretionary, technology and healthcare.
We think it’s a good option for low-cost, broad exposure to the Japanese stock market.
MORE ABOUT ISHARES JAPAN EQUITY INDEX, INCLUDING CHARGES
ISHARES JAPAN EQUITY INDEX KEY INVESTOR INFORMATION
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Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.