It has become an annual parlour game to guess whether the Nikkei will shake off the sclerotic lethargy of the past 30 years and finally consign the memory of the 1989 stock market bust to history. Last year looked relatively promising, with the index breaking through the 30,000 points barrier for the first time since Wham! had regular number one hits. Unfortunately, with the dollar strengthening against the yen over the course of 2022, the stock market has resumed its more typical range-trading behaviour as liquidity found its way into dollar-denominated accounts.
Still, being barely 4 per cent down for the year compares favourably with most major indices and perhaps highlights some of the features that make the Nikkei 225 comparable in some ways to the FTSE 100, aside from the obvious parallel of both being based in island nations with ageing populations.
In many ways, Japan is as dependent on the reopening of its society after the impact of the Covid pandemic as China, although it is further along in this process. The country is far ahead of its immediate neighbours in opening up and this should boost corporate profits in 2023 as the domestic economy recovers. In fact, Japan may be heading for that very rare commodity over the past 30 years – a period of sustained price inflation across most parts of the economy. The Bank of Japan forecasts inflation of 1.6 per cent next year as price rises become more entrenched. Observers have always said that a bout of inflation would be good for jump-starting the country's domestic spending notwithstanding the fact this estimated price growth pales in comparison to rates seen elsewhere this year.
The stars may have aligned for Japan, as one positive byproduct of the yen’s relative weakness in relation to the dollar is that Japan’s many exporters now find themselves with a substantial exchange rate advantage compared with this time last year. If companies can rebuild sales from a relatively low base, then profitability will improve without the need to do too much heavy lifting in the form of discounts and price cuts. In the meantime, the economy will have shaken off the worst effects of last summer’s spike in Covid cases, which suggests another quarter of slow growth in early 2023.
Investors finally respected?
It is not an exaggeration to say that minority shareholders in Japanese companies have generally been treated as an annoying inconvenience by boardrooms. The feeling is often mutual – in a uniquely Japanese take on investor relations, shareholders often paid professional questioners to attend annual general meetings and ask hours of often tedious and irrelevant questions as a way of getting back at the board and forcing them into making a pay-off to avoid the experience.
This state of affairs is exemplified by the historically miserly dividends that companies pay out, even when sitting on considerable cash resources. However, after years of corporate reforms, and quite a few scandals, there has been a substantial change in corporate culture and reporting that has improved the image of Japanese shares. This is even more apparent when you consider that two-thirds of the buying volume on the Tokyo exchanges comes from foreign demand.
Indeed, there were signs in 2022 that long-suffering shareholders in Japanese companies are being properly rewarded, for a change. The last corporate reporting season was a record for share buybacks, as reserves built up over the course of the pandemic were paid out. According to Bloomberg data, this amounted to a record $32bn (£26bn) over the course of the season – the highest total in more than 16 years. With more cash still available for potential payouts there is a good chance that this trend will continue into the full-year reporting season.
Value discount
This is important for investors when you consider that the average price/earnings ratio for the Nikkei 225 is now 20, compared with 29 for the S&P 500 and well below the 70 the Nikkei reached in 1989. The Nikkei has also behaved more like the FTSE 100 in 2022, maintaining its underlying price/earnings profile with lots of mature companies generating cash from established legacy businesses. Apart from the debacle at Softbank (JP:9984), Japan largely avoided the tech bubble that plagued the US markets. On top of this, many of its established industries, even those that strike a more modern note themselves, such as robotics, are benefiting from the move to shorten supply chains and reshore production.
Although the possibility of retrenchment does exist next year for Japanese companies, there is a clear value discount to be had alongside an exchange rate advantage. It is reasonable to forecast that the sun will rise on Japanese markets in 2023.
