Japan’s poor economic performance since the late 1980s has gone hand-in-glove with an even lousier stock market. However, the 2023 recovery of the Nikkei and Topix indices to levels not seen since the start of the 1990s showed that global investors have finally begun to take the country seriously again as an investment destination.
The Topix index is a blended measure of the Japanese stock markets (Japan still maintains large regional exchanges). It soared by roughly 26% in 2023 to outperform the S&P 500 in local currency terms.
The S&P 500 is still ahead in dollar terms—which, according to Goldman Sachs analysts, explains why some dollar-denominated investors have been reluctant to increase their exposure to Japan. But that hasn’t stopped other global investors from buying up Japanese stocks.
Valuations are cheap in Japan and investors are discovering that Japan has a lot of high-quality technology and manufacturing firms, particularly in the semiconductor sector. For example, Advantest (ATEYY) is a leading manufacturer of automatic test equipment for the semiconductor industry. Its stock is up more than 100% over the past year.
The reshaping of global supply chains away from China is another plus. This could unleash a wave of foreign acquisitions of Japanese manufacturers and facilities. At the least, it is igniting interest in those companies and stocks.
In addition, authorities at the Tokyo Stock Exchange (TSE) have also been pushing hard on Japan’s many capital-inefficient companies, whose price to book (P/B) ratio is below 1. They must either shape up or face financial penalties.
Keep in mind that, at the time the TSE began its push early in 2023, more than half of all TSE stocks were trading below their book value. The reason was that there was often too high a reserve of cash. And even though the penalties are years away, companies are already starting to follow the new script. Buyback announcements hit an all-time record, and cash dividend payouts from the aforementioned cash piles are also at a record.
In simple terms, these TSE reforms are having a big impact by changing cultural expectations (becoming more shareholder friendly) of Japanese corporate management.
One other structural change that seems to be boosting competition in corporate Japan—and thereby the productivity of companies themselves—is the unwinding of crossholdings. Crossholdings between companies has been one of the main criticisms of Japan’s market for decades. But now, Goldman Sachs research shows that crossholdings have reached a low of about 10% of the book value of all companies on the stock exchange.
And, more reforms are on the way in Japan…
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