Japan: on the rise

Oct 10, 2023

Historically, Japan has been seen as a challenged economy, with ageing demographics and high levels of debt being contributing factors.

However, global inflation has recently created an exogenous shock that may be helping to pull the economy out of decades of deflation. Furthermore, the structural changes being made by Japan Inc, such as raising wages and improving corporate governance norms, should improve profitability and competitiveness.

In our piece we look at several potential strong tailwinds for investors. We also discuss how investors need to focus on idiosyncratic alpha based on long-term, fundamental research in order to best capture the opportunities in Japan today.

Japan equities are under-researched compared to other developed markets and passive exposure is backward looking.

Active managers, on the other hand, are well positioned to benefit from opportunities arising from disruption and those associated with ESG, and they can provide selective exposure to the asset class in structurally winning industries and companies. They are also able to identify distinct opportunities in companies with high quality management and strong corporate governance.

This recent progress when it comes to best practice in Japan and corporate governance, including improvements in board structure and reporting, is increasing the opportunity set for stock pickers and leading to growth in total shareholder returns.

Finally, despite Japan being the third largest economy globally, the market is under-owned by global allocators. This presents another compelling argument for active investors, as both corporate fundamentals and fund flows could provide strong tailwinds to the market.

As a team with nearly 10 years of investing in the asset class, we are long-term and risk aware in our approach. Our bottom-up approach allows us to focus on companies with strong balance sheets, consistent cash flow generations, and high and/or improving return on capital. We take a disciplined yet unconstrained view of the benchmark to build differentiated excess returns over time, through a high conviction portfolio.

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