Theo Wyld, portfolio manager of the CC Japan Income & Growth Trust and the Chikara Japan Income & Growth Fund, explores why Japanese companies may offer a degree of resilience for investors during periods of energy-driven market stress.
The escalating conflict in the Middle East has unsettled global markets in recent weeks. With no clear resolution in sight as yet, the prospect of sustained elevated energy prices is raising concerns around a renewed bout of inflation, and the pressure that could place on company margins and balance sheets.
Against this backdrop, investors are increasingly focused on resilience.
A defining feature of Japanese corporates is their conservatism, with decades of risk-averse capital allocation resulting in balance sheets that are, by global standards, awash with cash.
That already provides an important buffer in a more uncertain world. But when combined with an active approach focused on companies with pricing power and strong margins, that resilience can be strengthened even further.
Dividend Resilience
A key concern for investors globally is that higher energy prices will squeeze company profitability and, ultimately, could force cuts to shareholder returns.
In Japan, however, dividends are typically well covered. Although corporate governance reforms are successfully encouraging companies to put more cash to work, Japanese corporates still hold far more cash on their balance sheets than global peers.
According to recent research from McKinsey, Japanese non-financial corporates still hold more than $1 trillion in cash, representing the highest ratio of cash to market capitalisation among developed markets. Many companies continue to hold between 15% and 25% of their assets in cash or cash equivalents.
Governance reforms will continue to encourage more productive deployment of this capital over time, with a revision later this year expected to focus on this issue specifically. But in periods of uncertainty like the one investors are navigating now, that cash buffer becomes particularly valuable.
Japanese companies will not be immune to rising energy prices or inflation – margins are at risk of tightening for many stocks, just as they are elsewhere. The difference is, strong balance sheets reduce the risk that short-term pressure translates into dividend cuts.
This is not just theoretical.
During the Covid-19 pandemic, dividends in Japan fell by only 2.1%, compared with a 38.1% decline in the UK.
More recently, as an example, Honda maintained its dividend forecast for the year ended March 2026 despite announcing a $15.7 billion EV write-down, illustrating how strong cash positions can provide resilience.
As we move through annual results season for the year ended March 2026 over the next couple of months, we expect this pattern to continue. Earnings may come under pressure in some cases, but Japan’s balance sheet strength should help support shareholder returns more effectively than in many other markets.
Adding an active approach
That’s the market-wide backdrop; and it’s supportive amid ongoing uncertainty. But an actively managed approach can offer even more protection by focusing on Japanese companies with strong pricing power.
In an inflationary environment, this matters greatly.
Businesses with pricing power can pass rising costs on to customers without materially weakening demand. That allows them to defend margins and protect earnings even as wages, energy prices and other inputs move higher.
This kind of resilience is often found in companies with strong brands, differentiated products or specialised capabilities. And these are precisely the characteristics we focus on in our portfolio.
Thanks to their pricing power, the companies we hold have an average gross profit margin of 35%, compared with 26% for the TOPIX as a whole. Gross profit margins are a good indication of the value-add a company generates for its customers – a proxy for pricing power.
Protecting against uncertainty
In uncertain times, Japan’s conservative corporate culture and strong cash balance sheets provide a valuable cushion against rising costs and economic volatility. Through active management, that resilience can be enhanced further by focusing on companies best placed to navigate an inflationary environment.
As investors weigh the implications of global instability, Japanese companies may be structurally better equipped to absorb such shocks.
