Throughout September, in Tokyo, New York, Hong Kong and London, the world’s biggest investment banks hosted a series of conferences for the world’s biggest investors, all gravitating around the same theme: is Japan really back?
And, according to both the attendees and hosts of those events — which were run by JPMorgan, Goldman Sachs, Bank of America, Mizuho, BNP Paribas, and Jefferies — the answer is now clearer than it has been in a very long time. Japan is back, but global investors may take a little more persuasion that it is truly back for the duration.
So, this week, prime minister Fumio Kishida will make his strongest ever push for a bet on Asia’s biggest advanced economy — as BlackRock founder Larry Fink, and other heads of global funds, gather in Tokyo for a series of events to attract investment.
“I would urge you to evaluate what we are doing in my country, look at the underlying strength of our economy and our plans for the future and then invest in Japan,” Kishida said in a recent speech at the Economic Club of New York.
On the face of it, the Tokyo conference guests have been told by various experts that the stars do appear aligned in Japan’s favour, both on its own merits and in comparison with what is happening around it. But, because so many global funds have diverted expertise away from Japan in recent years, they are concerned that they need to know more, as a matter of urgency.
“There is heightened interest in Japan after what has been, for many, a long period of not being focused on that country,” says Paul Hitchens, the head of the Japan research department at Jefferies, which hosted a major investor conference in Hong Kong.
There are distinctive catalysts for that, he adds — noting a recent push by the Tokyo Stock Exchange for companies to improve their capital efficiency, and the high profile decision of Warren Buffett to invest heavily in five of Japan’s largest trading houses.
Hitchens says: “Is there some healthy scepticism? Yes. However, global investment firms know that they need to invest and build their offerings in Japan to meet the growing appetite, and that they need to pay attention to an equity market at a 33-year high.”
Topix, Japan’s main stock index, has risen more than 25 per cent this year, outperforming almost all the world’s developed market indices and, as some conference attendees admit, creating a “fear of missing out” on a rally that may have significantly further to go.
Large global funds are not the only ones to have had their interest in Japan piqued, says Keith Truelove, head of global markets at UBS Securities Japan.
“There is still a lot of dry powder on the sidelines,” he observes. “There is a lot of interest in Japan from family offices and from high net worth individual investors, who value wealth preservation more highly than institutional investors — it’s really taking off now.”
“They took their time to decide if it was safe to invest in Japan again, because they need to get confidence in the idea that the Japan story will be more sustainable this time,” Truelove adds. He notes that Japan has offered investors a number of false-dawns over the years, and the bar for deciding that ‘this time is different’ remains high.
One of the most significant changes, say asset managers, is the fundamental shift in the way global funds now look at China. The geopolitics of US-China tensions, chip wars, decoupling and “friendshoring” seem, in particular, to be working significantly in Japan’s favour. Asia-focused global investment is rotating out of China and into Tokyo stocks, real estate and other assets, just as large parts of corporate Japan are engaging more actively with shareholders than at any time in the past.
China, after years of stunning growth and investor attention, is very rapidly losing that sheen. Its economy is growing more slowly and the expected post-pandemic rebound is proving elusive. On top of that, Beijing’s policymaking — with its sudden crackdowns on entire industries, like video games and private tutoring, has generated a series of nasty surprises — and the unshakeable fear that others could occur at any time.
“You are seeing more interest in Japan from investors, who were primarily invested in China, as China has slowed and some of its economic policies have been confusing and opaque,” says Kirk Neureiter, president of Fidelity Management & Research Japan. “Deployment of capital to China has been a bit more risky in terms of eventual outcome of investment decisions, given that lack of clarity.” But interest in Japan has not only come about because of the push away from China, he adds.
Japanese companies are increasingly aligning themselves with the interests of shareholders in a way that once seemed unlikely. Part of that, he says, is generational. Companies that replace their chief executive on five or seven year cycles now have leaders that reached their positions after the establishment of Japan’s stewardship code (in 2014) and corporate governance code (2015). Many have a very different view of the role of a chief executive than their predecessors did.
“I think that Japan, in terms of the unifying message that companies and the Tokyo Stock Exchange are sending out, now gives a lot more confidence about where they are deploying capital,” says Neureiter. “So people looking at the region are finding Japan incrementally more attractive. I’ve never seen such a consensus around what needs to be done for Japanese companies to improve capital efficiency and returns on capital,” he adds.
Efforts by Japanese businesses to demonstrate better governance are aided by government initiatives to make Tokyo more attractive for foreign asset managers. Kishida has promised major reform of the country’s $5tn asset management industry, which would ease regulations that had made it difficult for foreign and new players to enter.
The government plans to expand the Nippon Individual Savings Account (Nisa) tax-free investment scheme from next year in a bid to unlock $14tn in household financial assets that has long sat in cash and bank deposits.
“This is completely different from before,” says Stefanie Drews, president of Nikko Asset Management. “In the past, allocation to Japan had been tactical but this time it is strategic and that is why it is much more meaningful.”
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