The landscape for Japanese income investors has been improving significantly for years now, and 2023 was no exception.
Alongside strong equity market performance and prime minister Fumio Kishida’s continuing commitment to doubling household income from domestic investors, we finally saw the Japan Exchange Group execute its root-to-branch reform of the Tokyo Stock Exchange, placing a much greater emphasis on corporate governance standards.
All told, these factors stand both to expand the pool of quality Japanese stocks properly prioritising their shareholders and the amount of foreign investment entering the nation.
With this in mind, we’ve taken the opportunity to highlight five further, specific trends we expect to have a positive impact on Japanese stocks this year.
1) The revamp of NISAs
One theme that could have a very significant impact on Japanese investors will be set in motion right at the beginning of 2024.
From January, the annual investment limits on Nippon Individual Savings Accounts – or NISAs – in the country will expand significantly.
Each individual will be able to hold a permanently tax-exempt combined total balance of 18m yen in the products following the changes. That’s approximately $125,000 as at the time of writing.
The expansion forms part of the Japanese government’s plans to encourage citizens to put their savings to work in assets such as stocks. Should it be effective, and even a small portion of unlocked capital is directed towards Japanese equities, then the impact on valuations could be vast.
After all, more than 50% of Japanese household financial assets totalling 2,115trn yen were held in cash as of June 2023.
Naturally, we see the stocks that will benefit the most as those which combine strong growth prospects with a proactive approach to corporate governance.
2) Un-crossing cross-shareholdings
We also expect last year’s reforms to the Tokyo Stock Exchange, spearheaded by the Japan Exchange Group, to have a continuing impact in 2024. There are two areas in particular where we really see momentum building.
The first is the unwinding of cross shareholdings among Japanese institutions. The phasing out of this controversial practice – which involves listed companies strategically holdings shares in other listed companies – has been in place for some time now. But its decline has really accelerated since the Tokyo Stock Exchange began urging listed companies to lift their price-to-book ratios.
Cross-shareholdings hit their lowest level on record in the fiscal year ended March 2023. Companies such as Hitachi and Nippon Steel helped to sell off some 1.99trn yen’s worth of strategic shares during fiscal period 2022.
And we’ve already seen this direction of travel extend into the current fiscal year. Most notably, Toyota – among the most influential companies in Japan – recently announced plans to sell off part of its approximately $40bn portfolio in other companies.
Long may the trend continue, as far as we’re concerned. The shifting of shares from sticky holders either to general investors or back to issuers in the form of buybacks has very positive corporate governance implications.
3) The rise of MBOs
Sticking to the theme of stock exchange reforms, and the second impact we expect to see continuing is a rise in management buyouts – or MBOs – in Japan.
The Japan Exchange Group’s requirement for listed stocks to focus more on delivering corporate value is leading some boardrooms to look inwards. If they don’t want to – or cannot – give back to shareholders to the degree needed, then the real question becomes: ‘Do we needed to be listed at all?’. So far, it seems the answer in many cases is a very clear ‘no’.
The volume of companies being taken private by executives in Japan jumped by 170% year-on-year in 2023 to at least 870bn yen. Just in November, we saw Taisho Pharmaceutical partake in the year’s biggest MBO, with executives making an offer valuing the company at some 710bn yen.
Our view is this can only be a good thing. Ongoing management buyouts work to strip the market of companies that do not want to prioritise shareholders and increase the valuations of those that do.
4) Political turmoil
Political issues can also undoubtedly contribute to market dynamics. Right now, we’re seeing a certain degree of turmoil surrounding Kishida’s leadership.
Several public issues – most notably a recent corruption scandal forcing the resignation of several ministers – has led the prime minister’s approval to nosedive. In fact, the Liberal Democratic Party’s approval rating sat at 17.1% in December 2023 – the first time it has dipped below 20% since the party came into power more than a decade ago.
It is, of course, impossible to predict the long-term impact of this outcry. But it is worth highlighting that Kishida is closely tied with directives that stand to have a positive impact on Japanese stocks. Most notably, his emphasis on doubling household income from investments.
Some will naturally be wary of a backtracking of these efforts if Kishida were to lose his position at the head of the table. For our part, we are confident that any potential replacement would almost certainly continue his drive to get individuals investing. Japan’s over-reliance on cash is so widely recognised as a problem, it simply cannot be ignored.
5) Negative interest rate reversal
Last but not least, we believe the relationship between the yen and Japanese monetary policy will continue to be a hot topic in 2024. At the centre of this is the nation’s negative interest rates.
The best time for the Bank of Japan (BoJ) to reverse these is when the rest of the world is in a tightening cycle. And although this remains the case for now, the tide is shifting. With this in mind, it feels likely rates will increase sooner rather than later.
Higher interest rates tend to increase the value of a country’s currency. It’s why we’ve seen the value of the yen fluctuate greatly in recent times in response to off-the-cuff comments from the BoJ regarding its intentions.
So, it might be worth taking advantage of the yen’s current weakness before it is too late. If and when Japanese rates tighten, the resultant currency appreciation stands to create an opportunity for outsized returns.
Richard Aston is portfolio manager of the Chikara Japan Income & Growth fund and CC Japan Income & Growth Trust. The views expressed above should not be taken as investment advice.