Unlocking the ​power of Japan

Positive macro backdrop​

The Bank of Japan stands alone in its expansionary policy, aiming to foster a healthy inflation rate after years of stagnation. Recent wage negotiations have shown promising signs of a structural shift, with significant wage increases indicating a move towards an inflationary environment. This has led to the BOJ's first rate hike since 2007, ending the era of negative interest rates and signaling a cautious yet optimistic approach towards maintaining inflation without over-tightening monetary policy.

Corporate reforms and valuations

Corporate reforms are key to shaping this trajectory. More specifically, targeted efforts over the past decade have resulted in stronger, better run, and more profitable domestic companies. The upshot is the potential to unlock some of the significant value embedded in Japanese corporates.

Supportive flows

Data from Japan’s Ministry of Finance indicates that foreign institutional investors are only just starting to warm to Japanese equities after years of being underweight. And in a structurally higher inflationary environment, domestic investors are incentivized to put USD 7 trillion of cash and currency deposits to work.

A strong case for increasing allocations to Japan

For global investors, all this can translate to portfolio resilience and presents a strong case for increasing allocations to Japan.

We see an important role for Japanese equities in portfolios and a strong case for closing underweight allocations. We find that increasing allocations in portfolios even to a neutral benchmark level (based on the MSCI ACWI Index) could significantly improve a portfolio’s risk-return profile, due not only to the strategic investment case outlined above, but also to the diversification benefits.

Diversification supports the case for international investors to allocate more to Japanese equities over the longer term. This is based on two factors: the macro and the micro.

Macro conditions in Japan offer a different type of exposure than most developed market peers. In addition, the sector composition of Japan’s stock market is well-diversified compared with other developed markets. For example, rather than being dominated by a handful of tech stocks, as in the US stock market, or by semiconductors as in Korea and Taiwan, Japanese equities provide access to a range of industries, along with low correlations to other asset classes.