Despite global slowdown concerns, Japan's economy is experiencing steady growth. And that's thanks to pent-up demand, strategic government interventions, and favorable monetary policy – all leading to a healthy job market and rising wages that support consumer spending.
After decades of deflation, Japan is finally experiencing some inflation, which is prompting consumer and investor adjustments but has not yet put the central bank on high alert. The Bank of Japan continues to utilize innovative monetary policies like yield curve control to maintain the country's low interest rates and its economic stability.
Investment legends like Warren Buffett are increasingly attracted to Japanese stocks, enticed by a positive macroeconomic outlook, corporate reforms, and capital inflow. And that's despite concerns about potential false rallies and the lure of other investment options.
Despite global slowdown concerns, Japan's economy is experiencing steady growth. And that's thanks to pent-up demand, strategic government interventions, and favorable monetary policy – all leading to a healthy job market and rising wages that support consumer spending.
After decades of deflation, Japan is finally experiencing some inflation, which is prompting consumer and investor adjustments but has not yet put the central bank on high alert. The Bank of Japan continues to utilize innovative monetary policies like yield curve control to maintain the country's low interest rates and its economic stability.
Investment legends like Warren Buffett are increasingly attracted to Japanese stocks, enticed by a positive macroeconomic outlook, corporate reforms, and capital inflow. And that's despite concerns about potential false rallies and the lure of other investment options.
Country Overview
Rising from the ashes of World War II, Japan emerged as a top-tier global economy by the 1980s, driven by relentless innovation and an industrious work ethic. But when an inflated asset bubble burst in the early 1990s, the nation was dragged into the "Lost Decade" – a prolonged period of economic inertia, deflationary spells, and deep-rooted structural issues. But a resilient Japan persevered, diversifying its economic landscape with technology, services, and policy reforms.
Renowned for giants like Sony in technology and Toyota in the automotive realm, Japan's manufacturing sector – supported by a highly skilled workforce and the culture of "kaizen" or continuous improvement – is responsible for much of the country’s economic might. The services sector, especially tourism, is now becoming an increasingly significant pillar too. In an increasingly unpredictable global landscape, Japan's blend of modest growth, stability, and resilience is deemed more of a boon than a bane. And now that the country’s population is shrinking and birth rates are dropping, Japan has innovatively turned to tech advancements, robotics, AI, and global collaborations to strategically navigate its future trajectory.
Economic Update
Japan’s economy is chugging along
Japan’s economy is steadily chugging along, growing by 2% in the second quarter versus the same time the year before. And while the country might be dragged down by the global slowdown, its pent-up demand, strategic government interventions, and friendly monetary policy should buoy it up. Households are already reaping the benefits: there are plenty of jobs available and after years of stagnation, wages are finally seeing a nice bump. So despite rising costs, consumers are flexing their spending muscles, which should continue to support the economy.
Japan's stepping out of its deflationary shadow
After decades of deflation, core and headline inflation have zoomed past Japan’s 2% target recently – headline inflation even cozied up above 3%. Now, those price rises may soon slow down as import prices shrink, but consumers and investors are still gearing up for inflation settling in at a much higher level than in the past. So far, expectations aren’t high enough to spook the central bank but, as always, the economic landscape can shift in a blink.
Monetary policy should remain supportive, but a shift in policy shouldn’t be ruled out
The Bank of Japan (BoJ) has taken a pioneering approach to monetary easing, battling deflationary concerns while most of the world fights inflation. Through its unique Yield Curve Control (YCC) policy, the bank isn’t just anchoring short-term rates like many central banks, but also keeping long-term rates at historic lows to support the economy. BoJ recently tweaked YCC, allowing for slightly more interest rate movement, and that’s led to a steepening in the yield curve (dotted line) – generally a healthy sign for the economy. And while the move left many market watchers wondering whether bigger shifts are ahead, in the immediate future, the BoJ's commitment to sustaining low interest rates is unwavering.
Stock Market Overview
Japan's primary stock exchange is the Tokyo Stock Exchange (TSE), which ranks among the world's biggest by market capitalization. Now, when talking about market indexes, two names pop up: Nikkei and TOPIX. The Nikkei 225, often just called the Nikkei, tracks the performance of 225 big, blue-chip companies listed in the TSE. In contrast, the TOPIX (Tokyo Stock Price Index) is more encompassing, reflecting the performance of all companies on the TSE.
The main exchange-traded fund (ETF) is the iShares MSCI Japan ETF (ticker: EWJ; expense ratio: 0.50%). Instead of mirroring the Nikkei or TOPIX, it follows the MSCI Japan Index, which, similar to the TOPIX, offers a broad snapshot of the Japanese market, capturing around 85% of its market cap. Think of this ETF as a mixed bag of industrial, consumer-centric, finance, and tech firms. When stacked against the S&P 500, it's heavier on industrials and consumer sectors but leans lighter on tech and healthcare.
The ETF’s top ten holdings include world-famous companies like automaker Toyota, tech conglomerate Sony, and financial giant Mitsubishi UFJ. Also, industrial automation manufacturer Keyence, semiconductor Tokyo Electron, diversified tech conglomerate Hitachi, industrial conglomerate Mitsubishi, chemical manufacturer Shin-Etsu Chemical, pharma Daiichi, and financial services Sumitomo Mitsui.
With the top ten stocks representing only 23% of the index, the ETF is extremely diversified in terms of exposure to single companies.
Japanese shares are relatively cheap and high-yielding
Japanese stocks are cheaper and higher-yielding than their US counterparts: they’re serving up a dividend yield of 3.3%, and benefit from relatively attractive valuations with a price-to-earnings (P/E) of 12.6 and price-to-book (P/B) of 1.3. They are, however, less profitable, with a return on common equity of only 9% – almost half that of US stocks.
The tide may be turning for Japanese stocks
The TOPIX and Nikkei have taken off recently, catching the eye of investment legends like Warren Buffett, whose Berkshire Hathaway has been grabbing shares of some of the biggest companies in the region. After all, as we explained here, the tide may be turning for Japanese stocks. The macro picture looks increasingly positive, corporate reforms could uplift companies’ earnings and valuations, investors’ cash is flowing in, and Japan could potentially benefit from geopolitical tensions elsewhere. But of course, Japan’s stocks have had their share of false rallies in the past, and there are reasons to be skeptical about this one: inflation and reforms may fizzle out, the investors may be pulled away to more dynamic markets, and a global recession could hurt export-focused Japanese companies.
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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