Japanese stocks on Tuesday hit a 33-year high, fueled by growing hopes for higher standards of governance and more serious consideration for shareholders after decades of lackluster returns.
The broad Topix rose about 0.6 percent on Tuesday, bringing its gains so far this year to 13.9 percent and close to its highest level since Japan’s infamous market bubble burst in the final days of 1989. The Nikkei 225 has gained more than 16 percent Since the beginning of the year and again close to the post-bubble high, making Japan one of the hottest markets in the world.
Foreign investors have invested in stocks and futures in the past five weeks, with net inflows over the period of nearly $30 billion, according to the Tokyo Stock Exchange, among the largest inflows in the past decade.
In addition to excitement about the possibility of a historic rebalancing of corporate priorities, investors also said Japan benefits from “non-China” trade, a perception that Tokyo is a safe way to gain exposure to Chinese growth but with fewer geopolitical risks.
The interest in Japan comes after several false dawns and years of poor returns that persuaded many fund managers to turn away from Japan and its difficult institutional structures, especially with rich returns available elsewhere.
In the time it took Japanese stocks to recover from the crash of 1989, US stocks rose more than 10 times.
However, some warm to the idea that the Tokyo stock market is now a hoard of high-dividing, undervalued stocks with an accelerating wave of improvements in corporate governance.
Shrikant Kale, a Japanese equity strategist at Jefferies, said he hasn’t seen much foreign investor interest in Japan since the early days of the “Abenomics” era in 2012, when Shinzo Abe took over as prime minister and promised market-oriented reforms along with efforts. To revitalize the moribund economy.
Adding to the momentum was a rare visit to Japan by Warren Buffett last month, when the US investor made it clear he was keen to add investments to his Japanese portfolio.
At the same time, Japan is emerging as a large and developed Asian market that should benefit from China’s economic recovery without the geopolitical risks that overshadow its great neighbor, particularly with regard to Taiwan, several fund managers said.
Japan may be “the best option other than China for a global investor,” Calley said.
“Some investors think that Japanese companies are highly exposed to the upside in China, but also that you can own them as a hedge against geopolitical risks,” said Yunosuke Ikeda, chief Japanese equity strategist at Nomura Securities.
Many Japanese companies offer exposure to China through exports or because they would benefit greatly from Chinese travel to Japan.
Some investors said Japan’s relatively predictable policymaking also gives it an advantage over China, where regulatory crackdowns can be swift and damaging.
“Japan is in an interesting place geopolitically, and investors can’t miss that the rule of law is taken very seriously and the corporate governance system is very favorable to equity holders,” said Carl Fine, co-leader of the Asia Pacific Equities team. at M&G Investments.
Despite the declared optimism of many investors and the momentum behind the current rally, the “Buy Japan” theme has not yet resulted in a sustainable reallocation of assets. In the latest Bank of America survey of global fund managers, released on Tuesday and covering a survey period in early May, respondents net 11 percent less weight than Japan, down 1 percentage point from the previous survey.
But evidence of the momentum towards improving Japanese corporate governance and its dealings with shareholders is attracting investment into Japanese stocks.
In recent months, Hiromi Yamaji, the new chairman of the Japan Stock Exchange Group, which controls the Tokyo Stock Exchange, has suggested that the exchange intends to take a stronger stance on pushing companies to raise the value of their companies.
He told Japanese media that companies need to pay closer attention to the price-to-book ratio, share price and cost of capital, declaring that he was “not satisfied” with the way many listed companies have implemented the 2015 governance law.
“the [Tokyo Stock Exchange] “The topic is resonating with a lot of foreign investors and they are starting to see evidence of that on the ground,” said Bruce Kirk, senior Japan equity analyst at Goldman Sachs. Driving these stock exchange shifts into action, Kirk said, many companies are buying back stock, often confusing common shareholders and engaging more closely with shareholders before their regular general meetings.
Reported buybacks across Japanese companies rose to an all-time high of 9.7 trillion yen ($71.4 billion) in the fiscal year that ended in March.
Analysts expect companies to set a new record for buybacks by the end of May ahead of the annual meeting season when managements will be under more intense pressure to prove they are heeding the latest comments from the Tokyo Stock Exchange.
Geoff Atherton, head of Japanese equities at hedge fund group Man GLG, said encouraging the stock market meant “more has happened with this in the last two years than it has in the last 30,” creating the single biggest reason for stocks’ optimistic performance.
Atherton said the stock exchange “has a firm stance towards maximizing returns on equity”. They want to increase market capitalization. He added that the authorities can see that “in the world’s top 500 companies, there are very few Japanese, and it hurts their competitiveness.”
Buffett’s visit drew attention, but foreign investors said it did not change the country’s improving fundamental backdrop.
“It’s not Warren Buffett’s presence that makes it interesting. At M&G, Fine said he watches what others notice. “I am very excited” about the forecast, he added.