Lessons from Japan

The postponement of the Tokyo Olympics was a big blow for the twilight months of Shinzo Abe’s reign as Japan’s longest serving prime minister. Boosting tourism had been a crucial part of his plans to revive the Japanese economy, yet any hope of meeting the ambitious 2016 target of attracting 40m foreign visitors by 2020 was soon crushed by the pandemic.

Hosting the Olympics has a mythological significance for Japan, desperate to show the world it is a progressive, outward-looking nation. Officials have been scrambling to make sure the games go ahead next summer, but reduced capacity makes it unlikely they will “change the future of Japan” as the organisers had hoped.

Otherwise, Japan has survived this year in better shape than might have been expected for a country with whose gross domestic product is largely dependent on exports. The Japanese economy is forecast to contract by significantly less than the UK and much of Europe.

For decades, many UK investors have shunned investing in Japan, with fears of deflation, demographic problems and national debt of around two-and-a-half times GDP among the main concerns. But investors should remember that the economy is not the stock market, and in many areas Japanese companies have shown resilience in the face of adversity. 

Despite market jitters in August following the resignation of Shinzo Abe, citing a chronic illness, MSCI Japan is up 10.52 per cent for the year to 1 December. Replacement prime minister Yoshihide Suga had been Mr Abe’s right-hand man, and has broadly been welcomed by markets as a continuation of the status quo. 

Why should investors consider Japan? 

While Japan has never been a high dividend-paying country, its stock market has a dividend yield of 2.4 per cent, not to be scoffed at given very low levels of global interest rates. And given prudent capital management of Japanese companies, dividends look much more resilient than they do in the UK. Rob Morgan, investment analyst at Charles Stanley, says 55 per cent of Japanese companies have net cash on their balance sheets, against just 13 per cent in the US and 15 per cent in the UK.  

Other investors, including Warren Buffett, are turning to Japan because of valuations. The Sage of Omaha announced at the end of August that he had been building 5 per cent stakes in five Japanese trading houses over the past 12 months, totalling a chunky $6.3bn. 

Unlike in the US, gains in Japanese stocks have been driven largely by company profits, as the price-to-book ratio of Japan’s stock market looks broadly similar to what it did when Mr Abe took the reins. On 27 November 2020 the forward 12-month price-to-book ratio of the TOPIX was 1.2x, up from 1.0x at the end of 2012. The corresponding ratio for the S&P 500 is 3.6x today vs 1.9x in 2012.   

A year in funds

A number of Japan funds have had very strong performances this year. The table below shows the top five of the 90 Japan funds with a three-year track record in the Investment Association and Association of Investment Companies sectors, for the year to 1 December. Three smaller companies funds have made the top 10, and all have significantly outperformed the wider index over one, three and five years.

Top-performing Japan funds (to 1 December)