Reforms and structural shifts in Japan’s economy look set to usher in a new phase of sustainable growth and improved governance that should create differentiated, long-term sources of return for equity investors.
As a result, allocations to Japan can move beyond a tactical play in global portfolios, to become part of a core equities holding instead.
“Japan is undergoing a once-in-a-generation transformation that is fundamentally reshaping its economy, corporate sector and capital markets,” said Ivailo Dikov, head of Japan equities for Eastspring Investments, based in Singapore.
The outcome, he believes, is a steady uplift in market-wide return on equity and margin expansion that will have long lasting implications for investors.
“Value investors with discipline, engagement and bottom-up insights are best positioned to capture Japan’s reawakening,” Dikov added.
Turning point
His optimism follows the transition in Japan from a deflationary to reflationary economy, driven by sustained wage growth, inflation and policy normalisation.
At the same time, government subsidies and food reserves aim to ease inflation and boost spending power, while corporate governance reforms have led to improved board accountability, capital efficiency and shareholder returns.
These developments, combined with ongoing regulatory pressure and market activism, continue to push companies towards greater transparency and efficiency.
In response, Dikov said global investors are reassessing the domestic equity market, which represents a powerful combination of balance sheet strength, governance improvement, attractive valuations and untapped alpha – especially among small and mid-cap names.
These dynamics promise to move current allocations to Japan from modest to meaningful. “Japan’s undervalued equities are well positioned for re-rating, creating opportunities for investors willing to look beyond the headline indices,” explained Dikov. “The reality is that on-the-ground we continue to see opportunities that are far too compelling to ignore.”
Reform-driven demand
Continuing momentum behind Japan’s corporate reforms is driving change. In turn, investors can benefit from greater alignment between management and shareholder interests, higher levels of cash driving capital efficiency, and divestments of non-core assets to focus on core strengths.
“These changes are not only improving the risk-return profile of Japanese equities but are also unlocking new sources of alpha across both large-cap and small-to-mid-cap segments,” said Dikov.
Notably, small-to-mid-caps and value-oriented companies – which he sees as often being characterised by low price-to-book ratios and underutilised cash reserves – are particularly well positioned for re-rating.
AloJapan.com