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In this guest commentary, Marcus Weyerer, Senior ETF Investment Strategist at Franklin Templeton, explores the unique investment opportunities in Japan’s equity markets. Despite global uncertainties impacting the economy, Japan’s impressive progress presents a compelling case for investors, Weyerer states. He outlines five key reasons why Japanese equities should be in focus today.
1) The return of inflation
After decades of deflation, inflation is returning to Japan. The annual consumer price index has been consistently above 2% for over two years. This marks a turning point and has had a positive influence on economic momentum. For the first time in a long while, the Bank of Japan has the opportunity to establish a virtuous cycle of moderate inflation, rising wages, higher consumer spending and growing corporate profits. Unlike most Western developed markets, which have been battling excessive inflation, Japan’s inflation spike has the potential to benefit the economy by jolting consumers out of their hibernation. Companies are seeing improved profits as they can implement price adjustments without being thrown back into a deflationary environment. This environment thus creates attractive growth potential for shareholders and investors.
2) Improved corporate governance
The improvement of corporate governance in Japan is another key factor attracting investors. Under the administration of Prime Minister Shinzo Abe, corporate governance strengthening measures were introduced, making Japan more attractive as an investment destination. In 2023, the exchange undertook further reforms to improve equity valuations. These include an increased focus on transparency and improving their price-to-book ratios. These initiatives have led to increased participation from activist investors, a sign of the confidence of international investors. A prominent example is electronics giant Sony, which has actively engaged in implementing governance reforms. The company has significantly increased shareholder returns by improving the disclosure of business metrics and capital efficiency. Overall, the robust growth of corporate profits enables firms to implement more investor-friendly policies, like share buybacks which have soared to records during 2024.
3) Technological leadership in the semiconductor and robotics industries
Japan may have lost its former dominance in semiconductor manufacturing to countries such as Taiwan and South Korea, but it remains an indispensable player in the global supply chain. Companies such as Tokyo Electron, a leading semiconductor equipment manufacturer, and Renesas Electronics, a specialist in semiconductor solutions, continue to dominate significant portions of the global semiconductor production. Tokyo Electron, in particular, has established itself as a key company that is benefiting from the growing demand for chips for AI and 5G networks.
Additionally, Japan is a leader in the automation and robotics industry. Companies such as Fanuc and Kawasaki Heavy Industries are global pioneers in the development of industrial robots, which are used in a wide variety of sectors from automotive production to healthcare. These companies are well positioned to benefit from the growing demand for automation technologies in the coming years.
4) Innovation in healthcare
Japan’s ageing population, which has one of the highest life expectancies in the world, presents both challenges and opportunities. Thanks to an excellent healthcare system and considerable investment in research and development, Japan is at the forefront of healthcare innovation. Companies such as Takeda Pharmaceuticals and Astellas Pharma are benefiting from global demand for pharmaceutical products and medical care.
One significant area of innovation is the use of robots in caring for the elderly. Japan is betting big on technological solutions to compensate for the shortage of skilled workers in the care industry. Robots are being used to support caregivers and increase efficiency in care, reducing healthcare costs and improving patient quality of life.
5) Attractive valuations and long-term growth potential
Compared to many Western markets, particularly the US, Japanese equities remain attractively valued. The Nikkei index has been on an upward trajectory since 2013 and, despite recent market volatility, the medium to long-term potential for further growth remains high. Much of this growth is structural, driven by reforms in the corporate sector, the return of inflation and Japan’s technological leadership.
Stocks such as Toyota and Sony have benefited not only from economic reforms but also from their positioning in emerging technology fields. In particular, companies in the electric vehicle and semiconductor sectors have the potential to generate significant returns in the coming years as global demand for these technologies continues to rise. But Japan’s story going forward may be about more than tech – a resurgence of broad growth in the fourth largest global economy.
To sum it up, Japan currently offers a rare opportunity to benefit from long-term structural changes and a favourable economic environment. The return of inflation, improvements in corporate governance, technological leadership and innovation in healthcare, as well as attractive equity valuations, make Japanese equities a compelling investment. Investors should keep a close eye on this market to take full advantage of Japan’s growth potential.
