Japan has failed to deliver on promises to reform time and again, but it is showing signs of real change for “the first time in over 14 years,” according to Chris Metcalfe, chief investment officer of IBOSS.
He said that the “insular” nature of Japanese companies discouraged him in the past, but a significant shift in attitudes has made him excited about the region.
“I've been hearing about corporate governance for a decade, but this time the government seems to be really pushing it and that could potentially make a big difference,” Metcalfe added.
This strong drive to improve the running of Japanese companies could bring standards in line with businesses in the west, making them more attractive to foreign investors.
Metcalfe said a more positive attitude towards shareholders could be “the big catalyst for getting value in Japan” once it ditches an often “dismissive” stance on investors.
“The hope and expectation is that the companies are going to start running more like you would expect in Europe or the US,” he noted.
“That brings its own issues, but managers are saying this is a groundswell change, not just idiosyncratic changes to individual companies. It’s a Japan wide thing, which is why we've got more confidence in it.”
This was echoed by Jason Hollands, managing director of Evelyn Partners, who said UK investors “have a blind spot when it comes to Japan” because of these poor perceptions.
“It is a market tainted with a reputation of stagnation, an ageing and declining population, and which has been seen as dominated by a club of large corporations that are perceived as shareholder unfriendly,” he said.
“For those who have long ignored Japan, it is a market that deserves some exposure in a diversified, long-term portfolio.”
Japan garnered the attention of international investors who often overlooked the region after Berkshire Hathaway chief executive Warren Buffett increased exposure to five Japanese trading companies in May.
Naoki Kamiyama, chief strategist at Nikko Asset Management, said that this renewed interest from abroad should fuel the already improving attitude of Japanese companies.
“The attention that a renowned investor such as Buffett brings is a great opportunity for Japanese companies to revise their business strategy, restate their vision, and disclose non-financial information underlining the management strengths, thereby assuring investors that they are not a value trap,” he explained.
Improving corporate practises could make Japan a more attractive market, but its supportive economic conditions also make for a convincing investment case, according to Metcalfe.
Inflation fell to a 3.2% in May from a 40-year-high of 4.3% in January, making the monetary environment far looser than most western economies.
Indeed, the recent lifting of its last pandemic restrictions (mandatory mask wearing) was lifted in March, so it could be boosted by a post-Covid tailwind, Metcalfe added.
“I think it’s got one of the biggest, and probably the last, underappreciated reopening stories because everyone has been concentrating on China's reopening,” he said. “That was even more draconian, but it was pretty severe in Japan as well.”
Metcalfe has a 5 percentage point overweight to Japan, which he has increased throughout 2023 as its outlook improved, but he is considering going even further.
“Japan is probably the biggest geographical debate right now – we are bullish on Japan and already slightly overweight there, but the debate now is whether we go more overweight.
“There have been so many false dawns and some older people in the team reference all the times that Japan looked like it was going to break out and then didn’t.”
Metcalfe is hesitant to increase his already overweight position until Bank of Japan (BoJ) Governor Kazuo Ueda gives a clearer picture on how he plans to phase out yield curve control.
The newly appointed chief vowed to keep the policy – which keeps interest rates at a negative 0.1% - for now, but fiscal tightening could have negative consequences on the economy.
Even so, Metcalfe said he is not overly concerned by these potential moves by the BoJ, as it is unlikely to have a significant impact over the long term.
“We're tending to look at the more significant long-term factors – things like attitude to shareholders and better corporate governance – because that is ultimately what carries the day,” he added.
Metcalfe used JPM Japan as his vehicle of choice when gaining exposure to Japan. The £1bn was up 154.4% over the past decade, beating the IA Japan sector by 52.1 percentage points.
Total return of fund vs benchmark and sector over the past decade
Source: FE Analytics
Given the volatility in currency markets over the past year, JPM Japan’s unhedged nature reduced some risk and made it more appealing.
Metcalfe said: “We absolutely agree with lots of managers who say they don't take currency into account because it all comes out in the wash. That may be so, but you can have a lot of years where the currency goes in one direction and that's why we're trying to take out some of the volatility.”
“Over the past year we have definitely been gravitating towards teams that are more established, not just in Japan but generally,” Metcalfe added. “I think it's going to get harder for a lot of asset classes from here and having that experience helps.”