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Can Japan’s Bull Market Continue?

Harry Clynch | February 13, 2024

Japan’s benchmark Nikkei 225 stock index has surged towards all-time highs in recent weeks, breaching the $37,000 mark on Friday for the first time in over three decades and coming within 5% of the historic peak set in December 1989. The Topix index, which includes hundreds of smaller companies and is more strongly influenced by banks and financial firms, similarly hit a 34 year-high of 2,576 points.

A weak yen, which has made Japanese assets cheaper for foreign investors, as well as strong company results for the country’s major companies, are the two main factors driving the current strong interest in Japanese markets.

The Japanese #yen closed today’s Asian trading session at a three-decade low against the US dollar, with USD/JPY trading at around 150. #Japan

#DisruptionBanking (@DisruptionBank) October 26, 2023

Sean Peche, Portfolio Manager at Ranmore Fund Management, is one investor that is bullish on Japanese markets. One of Ranmore’s biggest holdings is in the Japanese commercial television network Nippon TV. Peche told Disruption Banking that Ranmore has seen Nippon as an attractive buy for several years because of its strong earnings and robust balance sheet – and is now reaping the rewards.

“Nippon TV is one of the largest television broadcasters in Japan, and despite the challenges with terrestrial television and advertising, the company has reported fairly stable earnings over many years. However, our investment rationale lay in unlocking the value on their balance sheet, not the potential growth prospects for terrestrial television in Japan,” Peche said.

“For many years, Nippon TV paid out less than 1/3 of earnings as dividends, reinvesting the balance in listed Japanese companies like Recruit Holdings (owner of and Glassdoor), Mitsubishi UFJ Financial Group, and Nomura. When we started acquiring a position in March 2022, tangible book value had almost doubled over the prior 10 years, but the share price was 8% lower.

“So why was any shareholder willing to sell us their shares at ¥1300 with tangible book value of ¥3200? Possibly because they didn’t believe management would ever return this value to shareholders or that it was a $2.5bn company and so monitoring any holding wasn’t “worth the hassle” for large asset managers,” he explained.

However, this value is now being returned to shareholders. At the start of February, the Nippon management announced they would initiate a buyback of 2% of their shares over four months. They also amended their company articles “in order to approve dividend payments to foreign shareholders who have been refused registration because the foreign ownership level of 20% had been exceeded,” Peche explained.

Foreign investors following Japan should take note of this significant development at Nippon TV. The company has just proposed to amend its Articles which will allow the company to conduct share buybacks opportunistically, despite the restrictions imposed by the Broadcasting Act.…

— 🍀 Yoyogi Capital 🍀 (@YoyogiCapital) February 2, 2024

Nippon is one Japanese success story that has demonstrated its value to investors and markets. But, even as the Nikkei approaches a record high, is there more to come?

Many asset managers are optimistic that Japan’s bull run could continue through and beyond the existing all-time highs. Lazard is one such firm that has expressed this opinion, partly because of improvements in Japanese corporate governance. The Tokyo Stock Exchange (TSE) has instigated several moves that Lazard described as prompting “market-friendly changes.”

These include overcoming the cultural taboo on unsolicited takeover bids – life insurance leader Dai-ichi Life recently made a surprise bid for the listed company Benefit One, setting an important precedent – and reducing cross-shareholdings in the Toyota group, which is selling down its assets. This signals that the – at times overbearing – dominance of Japan’s large and historic manufacturers could be coming to an end, opening up the market to increased competition. Is a “governance revolution” on the way – and could this unlock further value for investors?

Another reason for optimism in Japanese markets is that the Bank of Japan (BOJ) could be set to normalise monetary policy. The Japanese central bank has long been committed to maintaining negative interest rates, leading to an environment of deflation, and has previously said that rates can only start to rise once wages start to become higher, creating inflationary pressure.

Trade unions in Japan are reported to be demanding a minimum rise of 5%, which could establish the conditions after which the BOJ could then raise rates. A shift from deflation to inflation would be likely to change patterns in consumption, investment, and savings, such as by challenging citizens’ reluctance to invest as opposed to save. These trends would potentially be beneficial for equity markets in particular – however all eyes will be on the BOJ meeting in April to see if Japan’s central bankers do indeed change course.

On a broader, less technical level, Japan could also continue to benefit from geopolitical trends that are prompting some asset managers to reduce exposure to China. A sluggish post-Covid recovery in China, sharp declines in stock markets, and escalating tensions between east and west have all encouraged capital outflows from China. But with most banking and trading firms keen to retain their exposure to the Asia-Pacific region, many firms have simply shifted their investments to Tokyo from Beijing. Should this trend continue, we can expect further gains on the Nikkei and Topix:

It is worth pointing out that this bullish argument for Japan is far from the consensus. Indeed, according to the Buffett Indicator, which involves dividing the total market value of all public companies within a country by that country’s total GDP, Japanese markets are currently significant overvalued. However, there are also many arguments to suggest that Japan could see a further strengthening on its stock markets in the months ahead.

Author: Harry Clynch


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