Throughout September, the world’s largest investment banks hosted a series of conferences for the world’s largest investors in Tokyo, New York, Hong Kong and London, all centered around the same theme: Is Japan really back?
And according to the participants and hosts of these events – hosted by JPMorgan, Goldman Sachs, Bank of America, Mizuho, BNP Paribas and Jefferies – the answer is now clearer than it has been in a long time. Japan is back, but global investors may need a little more convincing that the country is truly back for the long haul.
That’s why Prime Minister Fumio Kishida will push harder than ever this week for a bet on Asia’s largest advanced economy – as BlackRock founder Larry Fink and other global fund chiefs gather in Tokyo for a series of events to attract investment.
“I would urge you to evaluate what we are doing in my country, examine the underlying strength of our economy and our future plans, and then invest in Japan,” Kishida said in a recent speech at the Economic Club of New York.
At first glance, conference guests in Tokyo were told by various experts that the stars appeared to be aligned in Japan’s favor, both on its own merits and in comparison to what is happening around it. But with so many global funds moving their expertise away from Japan in recent years, they fear there is an urgent need to know more.
“Interest in Japan has increased after many had not focused on the country for a long time,” says Paul Hitchens, head of Japan research at Jefferies, who hosted a major investor conference in Hong Kong.
There are specific triggers for this, he adds – pointing to the Tokyo Stock Exchange’s recent push for companies to improve their capital efficiency and Warren Buffett’s much-publicized decision to invest heavily in five of Japan’s largest trading houses.
Hitchens says: “Is there healthy skepticism? Yes. However, global investment firms know they need to invest in Japan and expand their offerings to meet growing appetites, and they need to be wary of a stock market that is at a 33-year high.”
Topix, Japan’s main stock index, has risen more than 25 percent this year, outperforming nearly all of the world’s developed market indices and, as some conference participants admitted, “sparking fears of missing out on a rally” that will take much longer could go.
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Big global funds’ interest in Japan hasn’t just been piqued, says Keith Truelove, head of global markets at UBS Securities Japan.
“There is still a lot of powder snow on the sidelines,” he notes. “In Japan there is a lot of interest from family offices and wealthy private investors who value wealth preservation more than institutional investors – now interest is really picking up steam.”
“They have taken their time deciding whether it is safe to invest in Japan again because they need to gain confidence in the idea that Japan’s story will be more sustainable this time,” Truelove adds. He notes that Japan has given investors a number of false pretenses over the years and the hurdle for deciding that “this time is different” remains high.
One of the most significant changes, asset managers say, is the fundamental shift in the way global funds now view China. In particular, the geopolitics of US-China tensions, chip wars, decoupling and friendshoring appear to be clearly working in Japan’s favor. Asia-focused global investments are shifting out of China and into stocks, real estate and other assets in Tokyo, while large parts of the Japanese economy are engaging more actively with their shareholders than ever before.
After years of breathtaking growth and investor attention, China is rapidly losing that luster. The country’s economy is growing more slowly and the expected recovery after the pandemic is a long time coming. What’s more, Beijing’s policies – with their sudden crackdown on entire industries like video games and private education – have spawned a series of nasty surprises – and the unshakable fear that more surprises could come at any time.
“You’re seeing more interest in Japan from investors who have invested primarily in China because China has slowed down and some of its economic policies have been confusing and opaque,” said Kirk Neureiter, president of Fidelity Management & Research Japan. “Given the lack of clarity, deploying capital in China was a little riskier in terms of the ultimate outcome of investment decisions.” But the interest in Japan wasn’t just driven by the move away from China, he adds.
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Japanese companies are increasingly aligning themselves with the interests of their shareholders in ways that once seemed unlikely. Part of it, he says, is generational. Companies that replace their CEO every five or seven years now have executives who reached their positions after the introduction of the Japanese Stewardship Code (in 2014) and the Corporate Governance Code (2015). Many have a very different view of the role of a CEO than their predecessors.
“I think Japan is now giving a lot more confidence in terms of the unified message that companies and the Tokyo Stock Exchange are sending about where they are putting their capital,” Neureiter says. “People looking at the region are increasingly finding Japan more attractive. I have never seen such consensus on what Japanese companies need to do to improve their capital efficiency and return on capital,” he adds.
Japanese companies’ efforts to improve corporate governance are being supported by government initiatives to make Tokyo more attractive to foreign asset managers. Kishida has promised a sweeping reform of the country’s $5 trillion asset management industry that would ease regulations that have made it difficult for foreign and new players to enter the market.
The government plans to expand the Nippon Individual Savings Account (Nisa) tax-free investment program starting next year to unlock $14 trillion in household financial assets that have long been held in cash and bank deposits.
“This is completely different than before,” says Stefanie Drews, President of Nikko Asset Management. “In the past, the allocation in Japan was tactical, but this time it is strategic and therefore much more meaningful.”
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