Nippon Rising: Time To Buy Japanese Stocks

japanese GDP growthTony Daltorio:  It’s been nearly three years since Prime Minister Shinzo Abe began his reforms to reinvigorate the moribund Japanese economy.

His reforms haven’t been a total success. Japan’s gross domestic product in the third quarter was negative 0.8%. Technically, that puts the country back into a recession.

Nevertheless, Japan’s stock market has once again become a good place to invest. It’s thanks to Abe’s reforms, with some outside help, which have almost completely changed investor psychology.

Both institutional and individual investors in Japan have become less risk adverse. This follows literally decades of investors being too afraid to invest in Japanese stocks after the market bubble burst 25 years ago.

The “nation of savers” is once again turning into a nation of investors.

Big Japanese Institutions Back in the Game

There are some very big institutions in Japan that have traditionally parked their funds in Japanese government bonds that yield practically nothing. These institutions include:

  • The world’s largest pension fund – the Government Pension Investment Fund – which holds $1.2 trillion.
  • Japanese insurance companies, which are sitting on $3 trillion in assets.
  • Japan’s largest bank – Japan Post Bank – has $1.7 trillion under management. It was recently privatized and now has a listed stock.

All of these institutions and many more have announced in the last year that their portfolios would move towards stocks, including domestic stocks.

There is definitely room for stocks to be bought. Japanese insurance companies still have less than 7% of their assets in stocks.

Corporate Reform Taking Root

Abe knew the only way to get more investments into Japanese stocks was by pushing for corporate reform. Japanese corporations had not been shareholder friendly and seemed to be run for the benefit of management and founding families.

But helped along by activist American investors, the corporate culture in Japan is rapidly changing.

Share buybacks in the third quarter for companies listed on the Tokyo Stock Exchange’s First Section amounted to a record 1.55 trillion yen. Share buybacks for all of 2015 are also on track for a record high.

Another sign of corporate reform in Japan was the launch of a new index in January called the JPX-Nikkei 400. It consists of companies that have higher levels of profitability and that meet minimum stands of corporate governance. Its nickname is the “shame index.”

Many Japanese pension funds now tell fund managers it is the standard for judging their performance, not the traditional benchmark Topix index. Not surprisingly, the JPX-Nikkei 400 is outperforming the Topix.

jpx-nikkei-400-vs-topix

Source: DataStream, via This is Money

Better corporate governance usually leads to better returns for shareholders. That emphasis by Japanese institutional money should put even more pressure on companies to upgrade their corporate governance.

A New Generation of Individual Investors in Japan

The real story for me, though, is the return of the individual Japanese investor.

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