Talking Point  

Market underestimates potential for Japanese equities

Market underestimates potential for Japanese equities

The Japanese equity market is very closely linked with the performance of the global economy, and the pace of the recovery is presently being underestimated by the market.

This is presenting an opportunity for investors, according to Archibald Ciganer, portfolio manager of the T Rowe Price Japanese Equity Strategy.

Ciganer says: “We currently believe that the market still underestimates the earnings impact of the ongoing recovery and of Japan’s operating leverage on the global economy.

"Given that Japan is one of the most cyclical and open global markets, highly leveraged to the health of the world economy, we believe that it will be a major beneficiary of the recovery.

"We continue to seek out opportunities benefiting from Japan’s digital reform. Japan has woken up to the fact that it is behind its developed market peers, and it is catching up quickly.

"The government recognises the importance of digital reform for its economy to move forward. Japan’s workforce is shrinking, and growth will therefore need to come from better productivity, which will be enabled by using digital technology more extensively.” 

He adds that corporate governance is improving in the country, and that this should also boost returns. 

Neil Goddin, equity fund manager at Artemis, says: “Japan is known as a value market and the traditional value plays, like shipping, have been strong in 2021, with Nippon Yusen up more than 250 per cent, for example.

"That said, markets in the US and Europe have still outperformed Japan. The reality is that quality companies make up the core of Japanese benchmarks.

"If we are really going to see sustained inflation and rising interest rates, then Japan is likely to outperform other markets. But that may simply mean it goes down less than elsewhere.”

Masakazu Takeda, portfolio manager on the Japan Focus All Cap Strategy at Sparx Asset Management, says: "I think it has become a 'friendlier' place over time. 

"For example, the share of Japanese companies listed on the first section of Tokyo Stock Exchange with more than two independent directors has increased from 21.5 per cent in 2014 to 97 per cent in 2021. 

"One of the drivers is the restructuring of the Tokyo Stock Exchange. In order to be listed on the prime market, companies will be required to have independent directors representing at least one-third of their board."

david.thorpe@ft.com