Japan, the world’s third-largest economy, is "entering a transformational decade" and should deliver some of the best global returns this decade as new mandates from the government and Tokyo stock exchange boost capital allocation and lead to increases in M&A and other strategic activity.
That is the view of investment bank Jefferies put forward in a note hailing a "new paradigm" after three decades of deflation.
Back in May 2023, Tokyo's lead index the Nikkei 225 notched a 33-year high as asset flows reverse to positive for the first time in a decade as 'green shoots' of inflation finally provide support to growth and investment.
Domestic retail investors have been incentivised to consider investments outside of cash and insurance and leading institutional investors are entering the market for the first time, the Jefferies research team said, with the Japanese Stock Exchange (TSE) "demanding change" as companies take action to better allocate capital and drive returns.
As well as the government also adding to the momentum with new guidelines for M&A aimed at spurring consolidation, the TSE's new requirements relate to liquidity, corporate governance, profitability and returns, with the aim of boosting capital efficiency amongst listed companies or potentially face delisting.
Of the 3,800 TSE listings, Jefferries noted that if the 43% currently trading below book value were to re-rate to parity, this would see an average upside of 35%.
The effects of the rules has already been seen in several prominent Japanese companies, with Toyota selling a stake in telecoms company KDDI, Sony announcing plans to exit its finance arm and Fujitsu selling a 50% stake in Shinko Electric, while more than 30% of companies on Tokyo's Prime market have already made required disclosures by the end of July.
"We believe the coming decade will see industries reshape in pursuit of operational efficiencies, scale, financial stability, raised competitiveness and growth," Jefferies said, also predicting heavy levels of consolidation of fragmented industries after the previous lost decades.
"We believe Japan Inc will deliver some of the best global returns this decade," the analysts said, with corporate action over the next 12-18 months catalysing investor attention and driving returns.
London-listed Japan funds
There are 11 investment trusts listed in London that are focused on Japanese companies, according to the Association of Investment Companies trade body.
Six of these trusts are in the AIC's Japan sector and five are in the Japanese smaller companies sector.
Of the larger six, Fidelity Japan Trust PLC (LSE:FJV), Schroder Japan Trust PLC and JPMorgan Japanese Investment Trust PLC have the best 10-year records on a share price total return basis, at 122.9%, 120.8% and 111.5% respectively.
On a five-year basis, it's CC Japan Income & Growth Trust PLC at 23.1%, Schroder Japan Trust at 19.8% and JPMorgan Japanese at 12.51%.
Among the smaller cap specialists, Baillie Gifford Shin Nippon PLC and JPMorgan Japan Small Cap Growth & Income Trust PLC are the only two with long-term records, having 90.5% and 85.1% respective share price total returns over 10 years, though both have negative returns over five years.
Over one year, Nippon Active Value Fund PLC is top with 29%, then the AVI Japan Opportunity Trust PLC at 2.15%, the JPMorgan Japan Small Cap at 2.6% and Baillie Gifford Shin Nippon at -18.1%.