It is not a secret that Japan is a market that has long been shunned by international investors. The ingrained aversion to the market, often times, is caused by the deflation and stagflation (including the so-called lost decade) in the 1980’s which has got many investors badly burned. Moreover, owing to the fact that the Japan’s well-highlighted aging population and hierarchical culture has been an impediment to labor and market flexibility and dynamism – not to mention that it lies in the 114th place in terms of ease of doing business – the country is simply ignored.
But experts say that Japan could see brighter days ahead. The election of Prime Minister Shinzo Abe and the success of his so-called Abenomics in speeding up the change and making it more visible after twenty years of deflation, had been broadly positive and had sparked hopes that the country’s economy could turnaround. And although the progress has been quite slower than many have hoped, the success is most likely seen to continue as PM Abe is “set to become Japan’s longest standing Prime Minister.”
So, despite the negative factors that had put Japan out of the picture over the past years, there are still good reasons why investors should rethink and reconsider. On that note, here is why it might still be wise to invest in the Japanese market.
The Abenomics is (slowly) working.
PM Abe’s economic policies known as Abenomics, which “stated goal was to use monetary easing, fiscal stimulus, and structural reforms to jolt the economy out of the ‘suspended animation'” that has affected it for twenty years, has been showing real improvements in the underlying structure of the economy.
“By the standards of the Japanese economy’s performance over the last couple of decades, which has been quite disappointing, the current outlook is fairly good”, notes Carnegie Mellon University’s Heinz College’s economic and public policy professor, Lee Bransetter.
In response to the policy, in 2014, Japanese inflation rose past 3%, eventually fell back below 0% in 2016, but rose once again to around 0.2% in 2017 after the central bank announced to “make yield curve control a central component of its new policy framework.”
“… the central bank is pursuing a policy of fairly aggressive monetary easing and that policy is likely to be maintained for the next several years, supporting growth”, added Bransetter.
This progress suggests that international investors should keep an eye on the current Japanese economic expansion as it could continue for several years with its economy that is expected to grow somewhere between 1% and 2% per year (or probably closer to 1%) – according to Bransetter.
A leader in technology.
When it comes to technology, Japan is a well-known leader – however, this is often through medium-sized firms rather than multinational giants. As an example, smaller companies produce different supplies (i.e., motors used in hard disk drives, etchers used in making LCD displays) enabling them to continue to dominate their niches while larger companies like Panasonic and Sony have been losing market shares to other firms.
Moreover, these large Japanese companies, as compared to foreign ones, have much larger barriers to entry primarily because they often manufacture high-end components in their own factories using their own supply chains.
International investors should be aware that many of the larger companies have been suffering from market share loss which means that there are more opportunities for stability with the mid-sized companies as they are less susceptible to crashes.
Soaring global stocks.
According to Rajesh Gandhi, lead manager of American Century’s International Growth Fund, Japan’s “well-managed globally competitive businesses that would do well in a diversified portfolio of international stocks” is one of the main reason for investors to keep an eye on Japan.
In November 2016, the Japanese stocks received an unexpected boost when Trump’s victory has sent the U.S. dollar soaring – and the yen toppling which helped the Japanese stocks to outperform many developed countries in the weeks after the election.
As suggested by The Balance, in order to maximize the gains from these dynamics, international investors should use currency hedged funds “since those funds offset the impact of a weaker yen upon conversation back into dollars.”
Japan might not be an obvious choice for international investors given the fact that the country still faces several challenges including its aging population and high levels of debt compared to its GDP. But it is important to consider that several potential catalysts are present in the horizon that could make the market attractive over the coming years – and investors who are interested in diversifying portfolios might want to look beyond the country’s known rivals, U.S. (a shareholder-friendly nation) and China (an emerging market and Japan’s economic and historical rival over issues on territorial disputes and Nanjing massacre).