Why Invest In Japan?

Macroeconomic Improvements: Japan's macroeconomic conditions are witnessing positive changes. Moderate inflation and a weak yen are expected to boost consumption and economic growth. Recent data showing significant wage growth, potentially leading to increased consumer spending, and economic expansion. For instance, Japan's monthly wage growth since 1997 suggests a favourable environment for economic activity
Low Valuations and Upside Potential: Japanese equities are currently trading at attractive valuations. With the market priced at around 12x earnings and 1.1x book value, close to trough levels, there is considerable upside potential. Historically, the market has rebounded quickly from such valuation levels, indicating a favourable outlook for investors.
Attractive Currency Dynamics: The weak yen presents a favourable environment for foreign investors. Japan's currency remains one of the cheapest in developed markets, encouraging foreign investment. A weak currency stimulates export-oriented companies and promotes tourism, contributing positively to economic growth. For instance, spending by tourists has historically contributed almost 1% to Japan's GDP.
Secular Growth Trends: : Japanese companies are well-positioned to capitalize on global secular growth trends such as automation, digitization, online commerce, and renewable energy. Japan hosts leading automation companies whose technology is in high demand globally. Efforts to catch up in digitization and online commerce are expected to drive growth across various sectors.
Improving Corporate Governance: Corporate governance reforms in Japan are addressing historical weaknesses in this area. Improved corporate governance is expected to narrow the persistent discount in Japanese equities and drive higher returns. Notably, Japanese companies have made progress in returning cash to shareholders through dividends and buybacks.
Active Management Opportunities: The under-researched nature of Japanese equities offers opportunities for active managers. Limited research coverage and under-ownership by investors create opportunities for active managers to uncover undervalued opportunities before the broader market. This presents a compelling case for active management strategies in the Japanese market. Japan's investment policy and support mechanisms reflect a concerted effort to attract foreign direct investment (FDI) and foster a conducive environment for investors. Here's an overview based on the provided data:
FDI Trends: Japan has seen an increase in FDI inflows, reaching USD 32.5 billion in 2022, the highest level ever recorded. While FDI flows remain relatively low compared to other developed nations, Japan ranks as the thirteenth-largest recipient worldwide.
Legal and Regulatory Environment: : Japan maintains a supportive legal and regulatory framework for investors. Regulations are continually aligned with international standards, providing a stable and predictable environment for investment. Intellectual property rights are well-protected, with robust enforcement mechanisms in place, ensuring the safety and security of investments.
Access to Capital Markets: Japan offers deep and accessible capital markets for foreign investors. Nearly all foreign exchange transactions are freely permitted, including profit transfers and capital repatriation. This accessibility enhances the ease of doing business and facilitates efficient capital allocation.
Challenges and Reforms: Despite the favourable investment climate, challenges persist, including historical reluctance towards mergers and acquisitions in Japanese corporate culture and weak corporate governance leading to low returns on equity. However, the government is actively addressing these issues through regulatory reforms aimed at improving corporate governance standards and enhancing investor confidence.
Labour Laws and Recruitment: Japan's labour laws and recruitment systems present challenges for investors, including inflexible regulations and a regimented system of labour management. These factors contribute to increased costs and complexities in human resource management. However, ongoing efforts to reform labour laws aim to create a more flexible and business-friendly environment.
Investment Thresholds and Notifications: Japan imposes relatively few barriers to foreign investment, with the main requirement being the submission of an ex post facto report to relevant ministries. However, legislation introduced in 2020 reduced the ownership threshold for pre-approval notification to the government for foreign investors, particularly in industries deemed to pose potential risks to Japanese national security.
Recognition and Rankings: Japan's favourable business climate is recognized internationally, with high rankings in indices such as the Global Innovation Index and the Index of Economic Freedom. Additionally, Japan ranks third in Kearney's Foreign Direct Investment Confidence Index, reflecting investor confidence in the country's investment environment.