The Japanese stock market is going the distance

Written by Kapronasia || October 12 2023

With Japanese stocks up 20% since March and the market showing no sign of flagging, one wonders if there is a fundamental change underway in the capital markets of the world’s third largest economy. Unlike in recent years past, Japan’s stock market has in 2023 produced the best returns of any major advanced economy, buoyed by a more pro-shareholder approach by companies and regulators. At the same time, investors are waking up to the opportunities Japan offers now that they are no longer starry eyed about China.

To be sure, the Japanese and Chinese stock markets are very different, and we cannot draw a straight line from reducing exposure to one and increasing investment in the other. Still, the Chinese economy and capital markets have sputtered this year amid a growing focus on national security. By comparison, Japan appears stable, low risk, and friendlier to business. With that in mind, it was no surprise when in September UBS Wealth Management said that equity investment flows in to Japan were higher than those in to China for the first time since 2017.

At the same time, the weak yen has been good for stocks. In many countries, a flagging currency would not be good for equities, but Japan is different. That’s because the heaviest hitters in the Japanese market are exporters like Toyota Motor, Sony Group and industrial equipment giant Keyence, which have performed well as the declining yen met the stronger-than-expected demand in the U.S. and Europe. As Barron’s recently noted, the iShares MSCI Japan exchange-traded fund (EWJ) has risen 22% in the past 12 months, beating a 16% rise in the S&P 500.

Some of the world’s largest institutional investors are bullish about Japan. The biggest of them, BlackRock, said in September that it would raise its allocation to Japan, despite a suboptimal global market environment characterized by high interest rates, sluggish economic activity and persistent inflation “We turn even more positive on Japanese equities, going overweight due to strong earnings, share buy backs and other shareholder-friendly corporate reforms,” the BlackRock Institute said. 

Looking ahead, Warren Buffett, whose buying and boosting of Japanese trading firms helped the market rally go from hot to red hot earlier this year, could target Japanese banks and insurers next. The legendary investor likes businesses that could be described as “boring” yet also with attractive valuations and solid fundamentals. So, tech startups and cryptocurrency, not so much, but Japanese financial firms – quite possibly.

Meanwhile, the five trading firms on Buffett’s A list — Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Marubeni Corp. and Itochu Corp. — are up more than 20% since a report in April said he raised holdings in the sector and sought to raise his exposure to Japanese stocks.