Ask any investor where the best stock market returns have been achieved in recent years and they will almost certainly mention the US. Most likely they will talk about tech stocks and the “magnificent seven”. The more engaged might give a nod to India. More recently they are likely to have noticed the fireworks in Korea.
The market they are very unlikely to place at the top of the leaderboard is Japan. Forty years on from the Japanese stock market and property boom, Asia’s most developed market still struggles to shake off its reputation as a deflationary demographic disaster.
It is the market I have always struggled to interest our investors in. Which is a shame. Because in the past decade and a half, it has been a fantastic performer.
If you had invested £100 in the FTSE 100 in the summer of 2012, you would have around £180 today. Not terrible, but an unexciting annualised return. By contrast, the same £100 invested in the US during that 14-year period would be worth £531, nearly three times as much.
No surprise there. The post-financial crisis recovery years were dominated by big, successful US tech stocks. What might surprise you, however, is that £100 invested in Tokyo over the same period is today worth £532. By the narrowest of margins, Japan has pipped the US to the post.
Japan has been the best-performing slice of my pension, un-flashily delivering the goods year after year. I think it will continue to do so. For a variety of reasons, the stars are well aligned for Japan. And I am no longer in a small minority of eccentric Japanophiles. The broader investment community is cottoning on.
Part of the case for Japan has been well rehearsed. The escape from 30 years of deflation – in which GDP barely grew, wages stagnated, and companies sat on their cash in the absence of anything better to do with it – is now firmly in the rear-view mirror.
Now the country is benefiting from a healthy level of inflation at around the Bank of Japan’s target, positive wage growth, and consequently improving domestic demand.
A second tailwind that is well understood is the positive impact of corporate reforms. Encouraged by the government and Tokyo Stock Exchange, the country’s leading companies have implemented these with surprising alacrity.
Better governance is showing up in the unwinding of complex cross-shareholdings, more mergers and acquisitions, and notably in growing levels of share buybacks and dividends. More than two-thirds of companies are increasing their payouts to shareholders, a new record.
What is new, and has the potential to keep the Japanese market bubbling, is the country’s exposure to the world’s big capital expenditure themes. Japan is the ultimate picks and shovels play, not just on artificial intelligence (AI), but on reindustrialisation, reshoring, automation and higher defence spending.
