Experts at Eastspring Investments, the $275 billion asset management business of Prudential, discuss how Japan offers investors multiple opportunities to capture alpha.
Ivailo Dikov, head of Japan equities and James Ying,
client portfolio manager at Eastspring
Investments, highlighted the re-rating runway of
Japanese equities.
The country is transitioning from a deflationary to a
reflationary economy, driven by sustained wage growth, inflation,
and policy normalisation. Meanwhile, measures such as government
subsidies and food reserves aim to ease inflation and boost
spending power.
“Corporate governance reforms have also led to improved board
accountability, capital efficiency, and shareholder returns.
Ongoing regulatory pressure and market activism continue to push
companies toward greater transparency and efficiency,” Dikov and
Ying said.
Japan has also been able to manage its trade and economic
relations with the US, with the two countries coming to an
agreement in late July 2025 with a tariff rate of 15 per cent,
one of the lowest rates among major economies and more favourable
than prior market expectations. The agreement positions Japan as
one of the US’ preferred trading partners. It also
provides more clarity on Japan’s economic outlook, which may
enable the Bank of Japan (BoJ) to continue normalising rates.
Dikov and Ying believe that Japanese equities present a
combination of balance sheet strength, governance improvement,
attractive valuations, and untapped alpha – especially among
small and mid-caps (SMIDs).
Japanese corporates are also unusually well capitalised. “Almost
half of the Tokyo Price Index (TOPIX) non-financial companies
hold net cash on their balance sheets – far higher than in the US
(25 per cent) or Europe (16 per cent),” they continued. This
financial conservatism acts as a buffer during turbulence and
offers optionality: as corporate governance reforms pressure
management to deploy excess cash, Dikov and Ying expect
increasing share buybacks and dividends – not just from large
caps but also undervalued SMIDs. “This also provides ample dry
powder for capex and M&As, which have reached record levels
this year and seem poised to maintain the strong momentum,” they
said.
“Beyond the well-known large-cap exporters, Japan’s equity market
is highly diverse and deep. Significant opportunities exist in
sectors tied to domestic consumption and services, many of which
remain under-researched and under-owned by international
investors,” they continued. “Small-to-mid-cap companies stand out
as an untapped source of alpha. These businesses often trade at
sizeable discounts to intrinsic value despite strong fundamentals
and catalysts for re-rating.” An attributing factor is that they
often have minimal analyst coverage – some estimates suggest over
40 per cent have no coverage –making them fertile ground for
fundamental stock pickers.
Japan’s forward price to earnings (P/E) and price-to-book (P/B)
multiples sit at material discounts to global peers despite
rising returns on equity (ROE) and free cash flow yields. “This
valuation gap reflects lingering scepticism – rooted in
deflationary history rather than current fundamentals – and
offers a margin of safety for value investors,” Dikov and Ying
said.
“Japan’s unique blend of corporate conservatism, reform momentum,
and deeply-discounted valuations provides a broad and deep
opportunity set,” they added. “From defensive large caps to
undiscovered SMIDs, and from domestic growth stories to global
exporters, investors have multiple avenues to capture upside as
structural catalysts play out…Japan also presents compelling
diversification benefits, underpinned by distinct alpha drivers
such as domestic consumption recovery, corporate reform momentum,
and de-risked balance sheets.”
Dikov and Ying highlighted that Japan is undergoing a
once-in-a-generation transformation that is fundamentally
reshaping its economy, corporate sector, and capital markets. The
result is a steady uplift in market-wide ROE and margin expansion
that have long-lasting implications for investors.
They are not alone in their views. Ronald Temple, chief market
strategist at New-York headquartered Lazard, recently
highlighted that Japan appears to be in the early stages of
an idiosyncratic improvement story that could positively impact
returns over the long term. Vincenzo Vedda, global chief
investment officer at German asset manager DWS is also constructive on
Japanese stocks. See
here.
AloJapan.com