Five Reasons to Invest in Japanese Equities Amidst Current Global Uncertainty

With wide ranging geopolitical uncertainty, and the full economic consequences of potential tariffs by the United States unknown, investors might understandably be hesitant to allocate capital to international markets says Theo Wyld, Portfolio Manager / Analyst of the Chikara Japan Income & Growth Fund and the CC Japan Income & Growth Trust plc

In the following analysis, Wyld highlights several compelling reasons to suggest that Japanese equities remain an attractive investment opportunity in 2025:

1. Corporate Governance Reforms Leading to Improved Shareholder Value

Japan has implemented a series of corporate governance reforms aimed at improving shareholder value. The Tokyo Stock Exchange (TSE) has been working hard to encourage listed companies to focus on cost of capital. These reforms include encouraging the unwinding of cross-shareholdings, enhancing board independence and diversity, and promoting better capital allocation often through increased dividends and share buybacks.

The TSE is actively monitoring companies’ responses and is set to strengthen engagement with those showing a commitment to these reforms. Starting in January 2025, the TSE began specifying which companies are seeking more active contact from institutional investors, even providing contact information for engagement departments. This increased transparency and engagement is expected to drive further improvements in corporate behaviour and, ultimately, to benefit shareholders.

Added to this, companies with poor governance and business performance have faced increasing pressure from shareholders at annual general meetings. The rise of activist investors in Japan, supported by more receptive institutional investors, bolsters this positive trend towards enhanced corporate value creation in Japan.

2. Japan Moving towards Sustainable Levels of Inflation

For decades, Japan grappled with deflation and sluggish economic growth. However, recent concerted efforts by policymakers, regulators, and corporate managers, coupled with global inflationary pressures, have finally pushed the Japanese economy towards sustainable inflation. Nominal wage growth reached a 33-year high in December 2024, signalling a potential end to the deflationary mindset that has hampered growth.

The Bank of Japan (BOJ) has acknowledged this shift by raising interest rates, indicating confidence in a “virtuous cycle between wages and prices.” Forecasts from the BoJ suggest a rise in Japan’s nominal GDP growth in 2025 compared to the previous decade’s average. This improving macroeconomic backdrop is crucial for corporate earnings growth and provides a more favourable environment for equity investments.

Japanese companies have already demonstrated an impressive ability to deliver solid earnings per share (EPS) growth despite slow real GDP growth, primarily through improved net margins. As the economy continues its recovery from deflation, this earnings growth potential is likely to be further amplified.

3. Attractive Valuations and Strong Balance Sheets

Despite the positive developments in corporate governance and the macroeconomy, Japanese equities still offer relatively attractive valuations compared to other developed markets.

As of the end of April, the Japanese market traded at ~20% discount to global markets. On an absolute basis, this multiple is no higher than what one would have paid a decade ago. Yet, the return on equity (ROE) of the market has risen from below 4% in 2012 to more than 9% today.

From a cash perspective, Japan also stands out, with over half of the listed companies boasting net cash on their balance sheet. This financial strength provides resilience in the face of global economic uncertainties and allows companies to pursue growth opportunities, increase shareholder returns, and weather potential headwinds from geopolitical events or tariffs. Some management teams may even take advantage of this uncertainty to invest counter-cyclically.

4. Technological Innovation Addressing Demographic Challenges

It is hardly a secret that Japan faces significant demographic challenges with a rapidly ageing and shrinking population. However, necessity is the mother of inventions. This demographic shift is spurring innovation and creating new investment opportunities.

With a growing elderly population, there is increasing demand for healthcare services, medical devices, and pharmaceuticals. As such, companies in these sectors are poised to benefit from this trend.

Furthermore, the shrinking workforce is driving the adoption of robotics and automation across various industries, including healthcare and manufacturing, to enhance productivity and fill labour shortages.

Investments in companies leading these technological advancements offer exposure to long-term growth areas driven by Japan’s unique demographic situation. The government is also actively supporting innovation in these fields to address the challenges of an ageing society.

5. Pragmatic Approach to Geopolitical Uncertainty and Trade Relations

Geopolitical uncertainty and the potential impact of tariffs are legitimate concerns. Japan has historically demonstrated a pragmatic approach to international trade disputes. Despite being affected by previous trade tensions, Japan has prioritised maintaining positive diplomatic and security relations, particularly with the United States.

Although the recent announcement of potentially high tariffs on Japanese exports is concerning and could negatively impact GDP growth in the short term, Japan was the first major economy to engage in bilateral negotiations with Washington. However, the two countries have yet to strike a deal and are moving into a third round of discussions, evidencing Japan’s patience and determination to reach a satisfactory agreement.

The Japanese government has expressed a commitment to protecting its economic interests while also considering broader strategic alliances. Moreover, Japanese companies have been diversifying their supply chains and investments over the past decade to mitigate risks associated with over-reliance on specific markets, including the United States and China. This proactive risk management could help to cushion the impact of potential tariffs.

Theo Wyld, Portfolio Manager / Analyst of the Chikara Japan Income & Growth Fund and the CC Japan Income & Growth Trust plc (20 May 2025)

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