Analyst coverage of Japan is nothing short of pitiful
Nicholas Weindling, fund manager, JPM Japan Fund and JP Morgan Japanese Investment Trust
Japanese equities have carved out a significant winning streak so far this year, in yen terms but notably also in all other major global currency term. We think the outlook for further gains from these levels is strong.
There are several pillars holding up this view: monetary policy is supportive and market-friendly, parts of the economy are improving, Japanese companies are and likely will continue achieving record profits, market valuations are not expensive and corporate governance is improving significantly.
The Bank of Japan remains aggressively committed to generating inflation, and that support will continue pushing up asset prices. Meanwhile, the economy is starting to slowly recover from the consumption tax impact and benefit from the impact of falling oil prices, which helps Japan meaningfully as they are a net oil importer.
Employee wages are on the rise. Wage growth gains have been increasing modestly from low levels, but it’s the most significant increase we’ve seen since 1998. We also sense from talking to companies that they see the labour markets getting much tighter.
Japanese equities are generating record profit levels and the market has been consistently upgraded by analysts in the last two years. Overall valuations have hardly moved at all even as the market returns have gone up a lot, so the market doesn’t look overly expensive at current levels.
We think that the most important reason that Japan can finally begin to close the gap with Europe and the US is down to the corporate governance reforms that are underway. In addition to all of the cyclical factors that are bolstering Japanese equities, the governance reforms are really a structural change. In relatively quick succession, we’ve see the creation and implementation of four major reforms that are changing the shareholder landscape:
- The new JPX – Nikkei 400 index (otherwise known as the “shame index”) emphasising Return-on-Equity (ROE) and governance factors as stock selection criteria
- The Fiduciary responsibility code for investors, where 160 institutional investors have already signed up
- The introduction of best practice guidelines for governance behaviour for listed companies
- New Institutional Shareholder Services (ISS) voting guidelines advising a 5% ROE threshold in the Japan voting guide and advising shareholders to vote against firms without at least two outside directors