Why we favor Japan in strategic portfolios​

In the spotlight

Japan is back in the global spotlight. A blistering stock market rally and a rise out from decades of either deflation or no inflation has brought the attention of investors across the world back to Japan’s markets. ​

We think the stable macro outlook – with mild inflation feeding higher wages and corporate pricing power – reinforced the upbeat outlook for equity returns on strategic horizons of five years or longer. That means Japanese stocks warrant a higher allocation on such horizons of five years or longer than the benchmark would suggest.​

Japan’s macro backdrop is conducive for risk – unlike in some other developed economies – in our view. In March this year, the Bank of Japan raised interest rates for the first time in nearly two decades, as part of ending its unprecedented monetary easing over the past decade. Yet we see it normalizing policy cautiously to protect the return to inflation and wage growth.​

Inflation’s long-awaited comeback in Japan brightens the outlook for corporate profits as companies can raise prices on products and services while rising wages are set to support consumer spending. Ongoing corporate reforms aimed at boosting shareholder value are another positive.​

On top of Japan’s brightening fundamental backdrop, we also see mega forces - big structural shifts like demographic divergence and digital disruption like artificial intelligence – shaping investment returns now and over the long term. An aging population has focused Japanese authorities on unlocking productivity gains via technological innovation. And efforts to move to a lower-carbon economy point to an infrastructure spending surge that could provide investment opportunities. ​

The granular investment opportunities on offer from the mega forces and the interplay between them reinforces why active strategies – those aiming to deliver above-benchmark returns, including dynamic approaches to indexing, may have a bigger role to play than before in equity allocations to Japan now compared with the past.

Japan for the long term

Hypothetical strategic allocation to Japan equities