After years of being shunned, Japanese stocks are getting attention from U.S. investors.
The reasons for avoiding the Tokyo stock market, which date to the late 1980s, are no longer applicable, say financial professionals, pointing to an increased focus on profits by Japanese companies and the fact that Japan is well-positioned to benefit from a global economic recovery.
"To compare now with the 1980s really is like apples and oranges," says John Vail, Tokyo-based chief global strategist at Nikko Asset Management.
In the late 1980s, a speculative bubble pushed up stocks and real-estate prices in Japan. Meanwhile, Japanese corporate culture wouldn't allow broken companies to fail, and shareholders were given short shrift from management in terms of things like buybacks and dividends, says Mr. Vail.
For most of the time since then, Japan's stock market has been weak at best. Only in November 2020 did the Nikkei Stock Average, which tracks Japan's largest traded stocks, surpass the 26489 level, a height it hadn't reached since March 1991. In comparison, the S&P 500 index was at 390 in March 1991 versus 4019 now.
In recent months, fund investors have been plowing loads of cash into funds focused on Japanese stocks. Inflows totaled $3.1 billion in the six months through January, according to data from Morningstar, compared with net outflows of $22.8 billion in five years from August 2015 through July 2020.
The inflows have coincided with a surging Tokyo stock market. The Nikkei gained 27% over the period Oct. 1 through April 1, far more than the 19% increase in the S&P 500 over the same period, according to data from Bloomberg.
Not a Tokyo bubble?
The good news is that this recent interest in Japanese stocks doesn't appear to be a replay of the bubble years of the late 1980s.
"I can assure you that there is no resemblance to the 1980s or 1990s in Japan except the level of Nikkei," Mr. Vail says.
For one thing, he says, corporate leaders have started to take their obligations toward shareholders more seriously, pointing to growth in earnings, stock buybacks and dividends.
According to a recent analysis by financial firm Schroders, the metric of corporate profitability known as return on equity (ROE) has started to trend higher in recent years.
The company found that far more companies were producing double-digit ROE in 2019 than in 2013. In addition, there has been a general shift from lower to higher ROE, with the most common corporate ROE in 2019 being 6%-7% versus 4%-5% in 2013.
Similarly, 2021 earnings for the companies in the Japan MSCI index are expected to rise 36%, according to a recent report from Yardeni Research.
Better Covid management
The renewed focus on profits in Japan isn't the whole story. Japan's government also has dealt with the Covid-19 pandemic well, says David Ruff, senior portfolio manager at Advisors Capital Management.
Japan's death toll per million people in the population recently totaled 73 compared with around 1,700 deaths per million in the U.S., according to the Worldometer database.
Japanese companies also are benefiting from surging exports to China, which came out of the pandemic earlier than most other countries, Mr. Ruff says. China is by far Japan's largest export market, well ahead of the U.S.
The country's industrial base also is prepared for the changing face of commerce. It has a high-tech sector that supplies vital components for electronic products and materials needed for greener power, says Fabiana Fedeli, global head of fundamental equities at Rotterdam-based investment management company Robeco.
"Demand for chips and semiconductors has significantly increased," she says.
Meanwhile, while some market watchers say the U.S. stock market is in bubble territory, they aren't saying that about Japan.
The Japan MSCI index recently traded at around 18 times next year's forecast earnings, according to data from Yardeni Research, far lower than the forward-looking price-earnings ratio of 22 for the U.S. MSCI index.
Of course, Japan's lower P/E is partly justified because Japanese companies don't perform quite as well as U.S. companies, Mr. Ruff says.
"It shouldn't be as good because the return on equity isn't as good," he says.
