When Japan’s benchmark Nikkei 225 stock index recently soared through 50,000 points to set a new record, it didn’t signal a new “bubble” type speculative boom, according to Hiromi Yamaji, chief executive officer of the Japan Exchange Group.
Instead, he argued that it showed growing investor recognition of fundamental changes in Japan’s economy and a consequent shift in global investment flows into the country.
According to Yamaji, who was the guest speaker at a luncheon at the Foreign Correspondents Club of Japan in Tokyo last week, Japan’s “move out of deflation continues, momentum is continuing and we are hearing good feedback from global investors”.
“Even heightened global uncertainty had a positive impact as the strength and appeal of the Japanese market became clearer.”
The facts appear to bear out his assertion. Japan is emerging from decades-long deflation, with the headline inflation rate constantly hitting above 2%. Firms are increasing capital spending, especially in automation and digitalisation, and also making labour-saving and efficiency-improving investments to address labour shortages.
And Japanese companies have set record high net profits for four consecutive years.
Yamaji said Japan is in a unique position in the context of the geopolitical situation, such as China-US tensions and a shift in global dynamics.
“Eurocentric portfolio investors are gradually shifting their investments out from the US and into Asia to diversify their portfolios – the ‘US plus one strategy’,” he said
China remains important, but not as much as before, and Japan has emerged as an alternative investment destination. The size of the Japanese economy and market, abundant liquidity, rule of law and relative stability make Japan one of the most investable markets in Asia.
Governance reform
The steady progress of corporate governance reform has also been a major factor in sustaining the momentum of investment flows.
But the world has likely not fully appreciated the nature and extent of the governance reform. According to Yamaji, “there are still some misconceptions about how active Japanese domestic investors are”.
“For institutional investors, their level of engagement and commitment to stewardship has increased with more transparency around their voting policies and practices. Also, retail investors have a stronger presence in the market,” he said.
The reform is creating sustainable and voluntary changes in the governance practices of companies, which has prompted strong foreign inflows into Japanese stocks.
The trend has continued since Sanae Takaichi’s election as Japan’s first female prime minister. She is an advocate of former premier Shinzo Abe’s market friendly policies.
The Japanese market also has ample room to grow on the back of domestic investment.
Yamaji pointed out that households still have more than 50% of their financial assets – estimated by the Bank of Japan at 2,200 trillion yen (US$14.7 trillion) as of September – in bank deposits and that only 2.6% of this has shifted from savings to investment since last year.
The shift is accelerating, however, which should provide even greater incentive for foreign investment.
