Tatton Teaser

Posted 31 July 2024

Japan – a true revival?

Japan has seen a resurgent stock market, as can be seen from the return chart below.

Given the previous hurt, and pain from investing in Japan in the late 1980’s bubble-era, which led to the stock market crash, many investors have since avoided investment in Japan.

However, there have been some key structural changes, which aim to modernise and revitalise the Japanese stock market. 

Namely, the reforms announced by the Tokyo Stock Exchange (TSE), to improve corporate governance and shareholder ‘friendliness’, under the broader umbrella of return on equity (ROE). This campaign, headed by Hiromi Yamaji, who became the chief of the TSE in January 2023 created the “name and shame” policy. This is intended to improve valuations, particularly focusing on companies with a price-to-book ratio of less than one – often driven by bloated balance sheets and poor capital allocation policies.

This policy along with others has seen an increase in the shareholder payout ratio of many Japanese corporates, including increases in dividends and share buyback schemes. Furthermore, a weak yen, which benefits exporter led businesses in Japan, has also positively impacted returns, particularly for overseas investors, which can be evidenced by positive foreign flows into the region.

The question now, however, is how sustainable this upward trend is. We’ve been here before with Japan, with brief periods of excitement, so is it really that simple to modernise a stock market in a developed country steeped in its traditions, values and beliefs that has failed to change so many times before?

Thank you Francesca Paver for the analysis.