Japan in focus

For some time now, Japanese equities have been performing to almost the same level as those of other countries, which represents an upturn in fortunes. Investors have been dabbling in Japanese equities for years, but have frequently been forced to come to the realisation that equities from other countries are a much better option in the medium- to long-term. This is especially true for non-Japanese investors who also have to take into consideration the effect of the Japanese currency, the yen, on performance. Read on for a brief explanation of some of the main factors influencing Japanese investments.

Japan has for many years been influenced by a combination of negative factors, some of which – but not all – have improved to some extent. The Japanese national economy is still impacted by much-higher-than-average government debt, which is, so to speak, a legacy of the excesses of the 1980s and the subsequent correction. Together with a long phase of falling inflation or inflation that was too low, this led to barely any increases in earnings for consumers and thus in insufficient economic growth.

While nominal growth of around 5% was considered the norm for the Japanese economy in the 1980s, this figure fell to an average of 1.9% in the 1990s and even further to -0.6% (annualised) in the 2000s and 2010s. In spite of everything, nominal growth has been recovering since 2022, standing at around 1 to 2%, with the COVID-19 pandemic having caused distortions. The low levels of inflation resulted in extremely unattractive interest rates in comparison with those of other countries, such as the US, which led to the value of the yen declining versus other currencies. Although this disadvantage did result in a recovery in exports, in Japan, as in other countries, the development of services and consumption is primarily important for long-term economic performance.

Some success has been recorded in these areas in recent times. After years without any wage growth, slightly higher rates of inflation caused wages to also start rising again. The question now arises as to whether Japanese companies will in the face of international competition also be able to impose price increases similar to those recently implemented by American and a number of European companies in particular, which had a famously positive impact on their profit growth.

Also of interest is the attempt by the Tokyo Stock Exchange (TSE), the Japanese stock exchange authority, to improve the profitability of public limited companies traded on the TSE. The stock exchange authority would like to see an increase in return on equity by means of better productivity, a reversal of the cross-shareholding of companies that has been the norm for decades in Japan and a general improvement in capital management to increase profitability.

Although there are initial signs of a reversal of the trend in these areas, there is still a shortfall in return on equity and profit margins versus US companies (not just from the technology and consumer sectors), other Asian competitors and also European companies. The recovery of the Japanese equity market in 2024 seems to have anticipated some of the more positive development that still needs to be realised and proven to be sustainable over several years.

This can also be seen in the considerable increase in the valuation of the Japanese equity market, which is now clearly higher than that of the European equity market as measured by the MSCI Japan.

For the future, it will be important to see whether Japan can keep up with other countries and regions on a macro level, particularly through clearly increasing consumption in combination with robust export volumes. This will not be easy to accomplish in view of the intensified international competition. At the same time, it is important to observe whether low levels of profitability can be overcome and international investors can be convinced at the micro level by means of rising profit margins and better capital management – in both the short and long term.

It is clear that a recovery of the Japanese currency would be crucial for non-Japanese investors. However, this would carry the danger of putting exports and thus corporate earnings at risk, as was the case before. For this reason, the Japanese equity market remains a complex and less transparent alternative to other equity markets around the world, although some progress has evidently been made.

Contact a client advisor for more information.

_{This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. The future performance of investments cannot be inferred from past price performance. In other words, the value of investments may increase but may also decrease, and the investor may be required to make additional payments for certain products. In certain circumstances, figures may refer to reporting periods of less than five years, which could reduce their validity. Predictions for the future are always non-binding assumptions. Figures presented in foreign currencies are also subject to exchange rate fluctuations, which can affect their performance. The information in this publication is in no way to be understood as an assurance of future performance. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability whatsoever for the content of this document; in particular, it does not accept any liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets.}

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Editorial deadline: 14 January 2025

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