Japan’s decade of sustained momentum: is it here to stay?
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Japan’s decade of sustained momentum: is it here to stay?

We believe several catalysts are creating a paradigm change in the country: the shift from deflation to inflation, corporate governance reform and increased domestic flows

  • Higher inflation is changing the dynamics of the labour market, with businesses under pressure to improve profitability and employees increasingly able to seek higher wages by switching jobs
  • Companies have introduced measures to shore up return on equity (ROE) in the near term, alongside rolling out longterm growth strategies by focusing on organic and inorganic investments for sustainable growth

We are frequently asked by clients if this time will be different for Japan. Are we finally entering the long-awaited phase of sustained momentum, or will short-lived excitement once again precede a period of stagnant growth? We actually think the next decade is shaping up to be different, with several catalysts creating a paradigm change:

Number 70x70_outlines

Deflation to inflation

This is expected to benefit consumers and
corporates, simultaneously kick-starting a new
era of economic growth.

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Corporate governance reform

The Tokyo Stock Exchange (TSE) announcements throughout 20231 triggered a better allocation of capital by Japanese companies and a greater focus on shareholder returns.

 

Number 70x70_outlines

Increased domestic flows

The updated tax exemption investment scheme
or “NISA” is expected to create a structural
shift in retail purchases of Japanese equities.

Number 70x70_outlines

Deflation to inflation

Last year, we wrote a piece on the end of the deflationary
mindset in Japan2 and how important the consequences
were for the economy, policy and market. The team were excited about this shift back then; six months later we remain optimistic that it will be a key driver for long-term economic growth.

Japan is synonymous with deflation; the “lost decades” from the late-1990s onwards characterised a prolonged period of deflation which hindered consumer spending and economic growth for nearly 30 years. Society was accustomed to falling or stable prices. People had no urgency to buy goods as the likelihood was that they would become cheaper. This mindset kept demand low, which in turn impacted business sales and subdued economic growth. Today, with prices slowly rising, the consumer may start buying more goods now rather than later (Figure 1). This marks a significant change from companies protecting consumers from rising costs and suffering lower margins themselves, demonstrating a shift in Japan’s deflationary mindset.

Figure 1: Japanese inflation remains moderate despite the rise
japanese inflation

Source: Citi, Inflation, Consumer Prices Y/Y % change, October 2023

The dynamics of Japan’s labour market are also changing
due to inflationary pressures. As inflation rises, businesses
are under pressure to improve profitability, forcing wage hikes to secure human resources. In turn, employee behaviour is changing as workers are more able to seek higher wages by switching jobs.

More broadly, the labour market will become more mobile, with higher inflation breaking key structural bottlenecks that have hindered Japan’s economy. Increasing labour mobility has been politically sensitive in Japan for decades given the social stigma around unstable employment. Workers predominantly prioritised ongoing employment versus wage increases, with previous legal efforts to reform the labour market seeing a decline in government approval ratings

However, the recent uptick in inflation and the weak yen are prompting change from companies and employees, rather than legislation. Throughout 2023 investors were pondering whether the convergence of cost pressure, labour market tightening and government policy changes would alleviate Japan’s deflation. This notional idea is swiftly materialising.

Number 70x70_outlines

Corporate governance reform

Although the shift in government policy started over a decade ago with Abenomics, the more recent TSE reforms seem to have triggered an adequate response from Japanese companies. Since 2012 the government and regulatory bodies have implemented various corporate governance measures; despite moving in the right direction, progress has been limited in terms of corporate responses over the same period.

Fast forward to the start of 2023 when the TSE urged listed companies with low price-to-book ratios to improve their corporate value, we noticed more companies putting measures in place to create value on a sustained basis. We are seeing these measures take place in many forms: share buybacks have soared to an alltime high, dividends are rising year-on-year3 , and there’s an increase in M&A spending.4 Alongside the recent measures implemented to shore up return on equity (ROE) in the near term, companies are rolling out long-term growth strategies to address this by focusing on organic and inorganic investments for sustainable growth, for example investing in research and development (R&D) and human capital. (Figure 2)
Figure 2: Japan’s ROE is trending up towards US and European levels
Japan_s roe

Source: CLSA, Microstrategy, December 2023

Figure 3: TOPIX ROE could rise to more than 12% if companies sell their equity holdings
topix roe

Source: Jefferies Microstrategy, FactSet, December 2023

The unwinding of cross-shareholdings in Japan will be a further boost for ROE. Japan’s archaic shareholding structure has been a chronic drag on capital efficiency. This should change as more companies are responding to regulator requests to improve disclosure, especially regarding cross-shareholding relationships and rationale. In a scenario where all companies in the Tokyo Price Index (TOPIX) sold their equity holdings and used the proceeds to fund buybacks, all else being equal the average ROE of the index could rise from 9.9% to 12.2% (Figure 3).5 We are already seeing a trend of companies selling their holdings. The median number of equity holdings per company in the TOPIX has fallen by approximately 30% in 10 years.,6 If the proceeds from divesting shares continue to be allocated towards growth investments or returned to shareholders, it will be positive to shareholder value. This significant unwind is expected to accelerate this year.

Number 70x70_outlines

Increased domestic flows

In a culmination of corporate governance reform and inflation, Japan’s government is also updating its tax-exempt investment scheme, the NISA. Changes include expanded tax brackets which should boost low investment rates among Japan’s population and help reactivate the economy. The mindset to keep cash in the bank should quickly change, particularly among the younger generation who are beginning to seek investment opportunities amid a backdrop of higher inflation. This is underpinning a structural shift from domestic household savings to investments.

Japanese equities could see an annual inflow of about $14 billion from the NISA. This assumes approximately 40% of new money flows into Japanese equities either directly or through investment trusts. In Q4 of 2023 alone, retail purchases of investment trusts with Japanese equity mandates outpaced foreign-focused vehicles by 38%.7 Furthermore, if Japanese domestic institutional investors, such as life insurers and pension funds, follow suit and re-allocate out of yen fixed income into domestic equities, the positive impact on Japan’s equity market would be accentuated.

Additionally, domestic flows are simultaneously converging with foreign flows. Japan is no longer viewed as a potential threat to the US and its allies, pursuing pacifist foreign policies and building strong economic and security ties with other regional powers. This underpins a stable socio-political environment, while favourable technology partnerships with Taiwan and investor diversification away from China continue to make Japan an attractive investment opportunity for foreign investors.

Japan is in a transformational decade and presents an increasingly compelling long-term investment opportunity for active investors. The world’s third largest economy is characterised by a combination of technological prowess, well-established infrastructure and economic stability. Factors such as forward-thinking government policies, a positive cycle of wage growth and inflation, and rising asset flows to support growth and investment have catalysed economic momentum. This makes us even more excited about Japan’s investment landscape for the decade ahead.

30 January 2024
Daisuke Nomoto
Daisuke Nomoto
Global Head of Japanese Equities
Simon Morton-Grant
Simon Morton-Grant
Client Portfolio Manager
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Japan’s decade of sustained momentum: is it here to stay?

1 Japan Exchange Group, Tokyo Stock Exchange, Enhancing Corporate Governance, June 2023
2Columbia Threadneedle Investments, Japanese Inflation: signs of meaningful change, 26 July 2023
3 Bloomberg, as at December 2023
4Nikkei Asia, Japan domestic M&A spending at 18-year high as buyout deals surge, 21 December 2023
5Columbia Threadneedle Investments’ analysis, December 2023
6Jefferies Microstrategy, December 2023
7 Bloomberg, Retail Traders May Boost Japan’s Stock Market More Than Expected, 7 December 2023

Risk Disclaimer

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication. The mention of stocks is not a recommendation to deal.

 

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
columbiathreadneedle.com

 

 

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Risk Disclaimer

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication. The mention of stocks is not a recommendation to deal.

 

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
columbiathreadneedle.com

 

 

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