Why It’s Not Too Late To Invest In Japan

If you’re thinking that you’ve missed the boat on investing in Japan, with so much buzz out there and so many people piling in after Warren Buffett went big on its assets, take a breath. Yeah, Japan’s stocks are having a year, with inflation finally waking up after a quarter-century, the central bank beginning to throttle back after years of extraordinary measures, and the yen hitting a 30-year low against the US dollar. But those shares are still likely a good bet. Here’s why.

For starters, Japanese companies are shifting their focus from internal stakeholders to actual profit. They’re also unwinding cross-shareholdings between companies (that’s when two or more companies hold shares in each other’s ownership), which means more cash to potentially be returned to shareholders. And with the economy finally seeing a return of inflation (ending years of deflation), it no longer makes sense for people to stash their money under their mattresses. They’re turning to investments like stocks and bonds for real returns. Plus, with companies able to raise prices again, they’re gaining the confidence to raise wages too. That means people now have more money to spend (and the incentive to do so), which is fueling demand – and that, in turn, is boosting sales and profits. And finally, at current valuations, Japanese stocks are still a good deal.

While Japanese stocks (gray line) have been soaring this year, hitting 30-year highs when priced in euros, the broad market index (green) has underperformed European stocks (blue). On both a price-to-book (P/B) and a price-to-earnings ratio, Japanese stocks still look cheap. The Tokyo Stock Price Index, or TOPIX, is trading at 1.29x P/B, while the S&P 500 trades at 3.97x. And, of course, the lower this ratio is, the better the deal.

Now, Japan’s big-cap firms are certainly benefitting from the weaker yen. They tend to be major exporters, so the money they’re making abroad is worth a lot more when they bring it back home and convert it. And so there’s a downside risk for those companies if the yen strengthens from here. The country’s small-cap companies, on the other hand, tend to be more exposed to domestic demand, which is keeping their outlook bright.

If you’re thinking about investing in Japan, you might consider the JPMorgan BetaBuilders Japan ETF (ticker: BBJP; expense ratio: 0.19%), the iShares MSCI Japan Small Cap UCITS ETF (ISJP; 0.58%), or, to smooth out the impact of a changing foreign exchange rate, the iShares Currency Hedged MSCI Japan ETF (HEWJ; 0.5%). But bear in mind that a steeper-than-expected economic downturn in the US or Europe won’t leave Japan’s export-oriented, relatively cyclical stock market unscathed.