Japan equities in 2023 are experiencing a surge of investments, with the highest inflows seen in 20 years. Despite this strong rally so far, Eastspring Investments believe there is still room for further upside.

“Foreign investors have been buying Japanese stocks and pushing the market to 33-year highs…After the strong market run, Japan’s equity valuations are now at the 10-year historical average of 14x earnings and as such no longer optically cheap versus its own history,” writes Ivailo Dikov, Head of Japan Equities at Eastspring Investments.

Dikov attributes the current surge in investments to a combination of factors. He points out that Japan is benefitting from a benign global economic environment, coupled with its own economy experiencing faster-than-expected growth. He also highlights the country’s accelerating post-Covid-19 reopening and predicts that the growth of inbound tourism will be a key driver for further expansion.

Additionally, Dikov informs that Japanese corporates are also unlocking value, with the Tokyo Stock Exchange putting pressure on companies to improve their balance sheets. Furthermore, the asset manager says that shareholder activist activity is increasing, leading to more cost-cutting and restructuring announcements.

Subsequently, Oliver Lee, Client Portfolio Manager at Eastspring Investments, highlights the need for attention in two areas: the low returns on Japanese equities and the poor operating margins of Japanese corporates.

Lee also mentions that inflation in Japan is broadening, allowing companies to increase pricing and improve margins. He adds that the labour market remains tight, contributing to a potential move away from the deflationary era. The asset manager also mentions that the Bank of Japan’s shift towards policy normalisation is being seen in a positive light, with higher rates being advantageous for financials.

“Japanese equities are set to remain in demand in the second half of the year. Any pullback in the market is likely to be used as a buying opportunity by investors. Perhaps the time has come for Japan to trade at a premium to long-term depressed valuation levels,” the asset manager concludes. 

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