When football managers are fired, their replacements often enjoy a period of good performance from their revitalised teams. Something similar has happened in Japan. Shortly after the country’s prime minister Yoshihide Suga resigned over his handling of the Covid-19 crisis in early September, share prices soared. Embarrassing, but perhaps an indication that Japanese equities deserve more attention from global investors. His successor Fumio Kishida formally succeeded him this week, triggering a downturn in stocks.
At almost 6 per cent, Japan holds the second-largest weighting in MSCI’s All Country World index. Note that Japan’s stock prices have not traded in lockstep with those of its international peers. Compared with Europe (ex UK) or the UK, Japan crucially has a much lower positive correlation to US stock markets over 10 years, notes Citi. Some might fear the risk of China contagion throughout Asia. Yet the link with Chinese stocks is not high either, statistically lower than Germany, the UK or the US.
Valuation provides another hook. At a forward price to earnings multiple of under 15 times, MSCI Japan is almost a fifth cheaper than the all-country universe (excluding Japan). Since last year Japan’s dividend yield has consistently exceeded the world index for the first time in decades.
Critics will counter that purchases of Japanese equities by the Bank of Japan, as part of the country’s stimulus plans begun by former prime minister Shinzo Abe, have bolstered prices. However, those purchases have tailed off this year — with none since the summer. More pertinent is how the BoJ will unwind the trillions of yen of shareholdings accumulated over a decade.
The government has kept quiet on this subject. But a precedent set decades ago might offer answers, notes Peter Tasker of Arcus Investment. Sell shares back to the public at a discount, perhaps with a lock-up period, as did Hong Kong following the late 1990s Asian market crash.
Local investors, mostly through mutual funds, have driven previous rallies. When sizeable foreign buying does finally return, expect an even stronger win for Japan.