2025 outlook for Japanese equities

Investors should consider the potential that Japanese equities can deliver over the long term

The transformation of the Japanese economy and corporates is driving the potential for more attractive long-term returns in the Japanese equities.

Inflation is a new thing for the Japanese as there was an absence of it for the past almost three decades.

Initially, companies struggled with margin shrinkage but decided to pass on the costs onto prices, says Junichi Inoue, Head of Japanese Equities, at Janus Henderson Investors.

“Japanese stocks have become much more investable today,” he says. “Now, companies are seeing this as an opportunity to reset margins and maximise profit. Consumers initially struggled to accept the price hikes, but now it has become the norm. As prices are increasing, consumers are not postponing their purchase decisions anymore.

“So as a business, capex [capital expenditure] decisions tend to be much quicker than they were in the past, which is accelerating the economy.

“Real wage growth has turned positive this summer, for the first time in years. I believe there is a positive cycle established in the economy.”

Mr Inoue adds, “There has been good progress in terms of corporate governance change in Japan. It is very important to know who owns Japanese companies. It used to be financial institutions like banks and companies. They didn’t care about minority shareholders.

“Now foreign investors own more than a third, and Japanese institutional investors also own a similar amount. Investors like us are the majority.

“The government made sure by introducing Corporate Governance Code and the Stewardship Code to make sure that we talk to each other, and companies eventually create shareholder value.

“Dividend growth for the past ten years has been higher than EPS growth, and if you include share buybacks, payout to shareholders is even greater.

“This is how investors will be rewarded through a corporate governance change improvement. These are just some of the many supportive reasons why we believe investors should consider the potential that Japanese equities can deliver over the long term.”

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References:
[1] Source: Moody’s Analytics, Japan economic indicators as at Q2 2024.
[2] Source: Morgan Stanley, Janus Henderson Investors as at June 2024. Comparison of Japanese companies’ total dividends and share buybacks in 2015, 2020 and 2023.