Warren Buffett, the influential US fund manager, is expanding his holdings in “sogo-shosha” trading giants such as Mitsubishi.
Thousands of Chinese tourists are back in Tokyo and Osaka, eager to spend. And the weakness of the yen makes exports more competitive, “turbo charging returns,” says one observer.
These are just some of the reasons behind the growing enthusiasm for Japan. A solid ally of the West in a troubled region, this country is home to Bridgestone, Canon, Honda, Nintendo Sony, Toyota and Toshiba.
It also has smaller players in niche industries, as Nicholas Price, manager of the Fidelity Japan Trust, points out.
Bosses of all shapes and sizes are breaking free of culturally ingrained preconceptions about how a company should be run. They are also deploying technology to address labor shortages in ways that low-population western countries may have to adopt in the future, as Yuichi Murao, chief investment officer at Nomura Asset Management points out.
Big in Japan: Japanese stocks have often been a “value trap,” that is, cheap for a reason
Thanks to such factors, the Nikkei – 225 blue-chip stocks such as Fast Retailing, owner of the Uniqlo clothing chain – is close to a 30-year high, an increase driven by the belief that Japan offers what Alec Cutler, manager of the Orbis Global Balanced Fund, calls “a ton of value.”
The broader Topix index is up 23 percent this year: Bank of America analysts believe it could rise another 33 percent over the long term.
You may be a bit cynical because you’ve heard it all before since Japan’s Great Recession in the 1990s. Japanese stocks have often been a “value trap,” meaning cheap for a reason.
Joe Bauernfreund, chief investment officer of the AVI Japan Opportunity trust, acknowledges that the “this time it’s different” claim has been made before.
But he claims it could very well be different given the evolution of Japanese business.
Traditionally, managers have not been incentivized to care much for shareholders. Instead, they have focused on stakeholders – their employees and retirees.
US executives are doing their utmost to become fabulously wealthy by increasing earnings per share (EPs) ratios. In contrast, “Japanese are ashamed that they earn more money than their neighbors,” says Bauernfreund.
However, corporate governance reforms are changing the environment. The Tokyo Stock Exchange is asking companies with a price-to-book ratio of less than one to reveal how they will remedy this situation where the share price is below the asset’s book value.
In pursuit of this goal, Japanese companies are buying back and spending their shares: capital investment may have reached a record 31.6 trillion yen (£164.3 billion) in the year to June 30. For example, semiconductor component maker Kyocera will open its first production facility in Japan in two decades.
After years of deflation, inflation has set in, forcing companies to raise prices, which improves profit margins. Bauernfreund says asking customers to pay more is seen as a betrayal of trust, but again, attitudes are changing.
AVI Japan Opportunity looks for companies where the cash pile is 30% or more of the market cap; some companies have as many as 10 pcs. The trust holding company includes Nihon Kohden, a medical electronics company.
Buffett may have increased his holdings not only in Mitsubishi, but also in Itochu, Marubeni, Mitsui and Sumitomo. But unlike personal investors, the Berkshire Hathaway guru has access to detailed research. For example, Itochu is active in the chemical sector. But it also runs the Family Mart corner stores and has interests in Converse sneakers and Paul Smith clothing.
The challenge of assessing these complex structures means that funds are the easiest way to bet on Japan. The best buy lists of the investment platforms include names like: ishares Japanese Equity, JPM Japan, Jupiter Japan Income and M&G Japan.
Interactive Investor considers Lindsell Train Japan an adventurous choice. Investments include Nintendo and cosmetics conglomerate Shiseido, the company behind Nars and other brands.
Also reviewed are Baillie Gifford Japan and Baillie Gifford Shin Nippon; the second of these trusts has an 11 percent discount on the net worth of its assets, making it a seemingly cheap route to smaller Japanese companies.
That’s the level of excitement that there can be some relapse.
I may not wait for this to add to my small exposure to the world’s third-largest market, but I’ll be aware of the risk of believing it’s different this time.
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