Global investors eyeing Japan stocks
International investors are due to boost their exposure to Japanese stocks or consider adding them to their portfolios for the first time this year as we see the country’s stock markets hit levels not reached since 1990.
Indeed, the Nikkei 225 has surpassed the 30,000 mark, which hasn’t been done in more than three decades.
As I explained in columns I wrote for Asia Times and Newsmax earlier this month and was quoted by Advisorpedia, Value Walk and Business Traffic, amongst other media, the reason for this is Japan’s economy – the third largest in the world – is experiencing inflation that hit a 40-year high in February and continues to remain hot.
Although steep price gains are rarely attractive, Japan is the exception following spells of deflation since the late 1980s and early 1990s.
Japan has been tackling the continuing problem of low inflation and deflation for a number of decades for four principal reasons.
Firstly, its ageing population and the declining birth rate have resulted in a shrinking workforce and a reduction in consumer spending. With fewer people entering the workforce and spending less, demand for goods and services is down, resulting in stagnant prices.
Secondly, Japan has faced lengthy periods of economic stagnation, characterised by slow growth and weak consumer and business spending. In turn, this has limited the potential for inflationary pressures to build.
Thirdly, Japan has one of the highest debt-to-GDP ratios among developed countries. In order to manage this debt burden, the government has introduced accommodative monetary policies, such as ultra-low interest rates and quantitative easing. Although the objective of such policies was to stimulate economic growth, they haven’t translated into considerable inflationary pressures.
And fourthly, the country has faced a series of structural challenges in its economy, including weak productivity growth, a capacity overload in specific industries and limited wage increases. This has contributed to a lack of upward price pressures.
That said, more recently, as Japan’s economic recovery continued thanks to supportive monetary and fiscal policies and a rise in tourism, inflation has soared.
As such, the rising prices are eroding the purchasing power of Japanese investors. They’re now seeking alternatives, and we forecast Japanese equities will be the go-to to preserve or even boost their investments’ real value.
Equities are typically viewed as a likely hedge against inflation. When prices go up, the value of a firm’s revenue and earnings may rise, resulting in higher stock prices.
Therefore, should Japanese investors pile into the Tokyo and Osaka exchanges, equity values will inevitably rise, and this will grab the attention of international investors seeking to diversify their portfolios further to make the most of opportunities and mitigate risk.
There was a long period of economic stagnation in Japan in the 1990s and 2000s, usually referred to as the Lost Decades. This era was typified by low economic growth, a weak stock market and deflation. As such, the downbeat perception of the country’s economy over this time discouraged international investors from considering Japanese equities.
Furthermore, historically, Japan’s corporate governance practices and transparency standards were deemed comparatively weak compared to other developed economies. This lack of transparency and shareholder-friendly practices led to a number of potential overseas investors being cautious about investing in Japanese businesses.
In addition, equities in Japan haven’t consistently outperformed other global equity markets over the past few years.
Nevertheless, with values likely to rise as investors shed cash and fixed-income investments due to mounting inflation, the inclination to overlook Japanese stocks will be reversed.