# Why aren’t more global investors buying Japanese equities?
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2017-04-04
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: Japanese Equities Rally: Are They Undervalued?
Meta Description: Discover the reasons for a potential rally in Japanese equities outlined by Tom Elliott, deVere Group’s International Investment Strategist. Find out more now.
URL: https://financedigest.com/why-arent-more-global-investors-buying-japanese-equitieshtml

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**Tom Elliott**, deVere Group’s International Investment Strategist

The arguments for a strong rally in Japanese equities are in place. Global growth is picking up, and the TOPIX is traditionally a play on this theme. Smaller companies will benefit from improving domestic economic data, with the Bank of Japan forecasting real [GDP growth](https://www.financedigest.com/spain-q2-quarterly-gdp-growth-revised-to-1-5-from-1-1.html "Spain Q2 quarterly GDP growth revised to 1.5% from 1.1%") at around 1.4% for 2017.

The [number of share buy-backs is at a record](https://www.financedigest.com/record-number-of-migrants-arrive-in-britain-by-boat-on-a-single-day.html "Record number of migrants arrive in Britain by boat on a single day") high, while dividends look set to grow thanks to strong cash balances in corporate accounts. [Goldman Sachs](https://www.financedigest.com/telefonica-hires-goldman-sachs-to-sell-uk-mobile-masts-stake-el-confidencial-says.html "Telefonica hires Goldman Sachs to sell UK mobile masts stake, El Confidencial says") are forecasting a respectable 12.5% in corporate earnings growth for the many companies with year-end reporting dates of 31st March.

And yet the Japanese stock [market has substantially underperformed other major stock markets](https://www.financedigest.com/yes-winning-the-euros-really-can-help-your-stock-market.html "Yes, winning the Euros really can help your stock market") year-to-date. The MSCI Japan index is up 1.6% year to date compared to 5.9% for the MSCI Kokusai [World](https://www.financedigest.com/world-food-price-index-falls-for-sixth-month-in-sept-fao.html "World food price index falls for sixth month in Sept -FAO") ex Japan index (both in local currency terms, income reinvested, as of close 29th March).

Japanese companies appear cheap. The TOPIX index trades at an average of 1.75 [times book value](https://www.financedigest.com/in-line-transit-time-ultrasonic-flow-meters-sales-are-set-to-be-valued-at-us-337-5-mn-in-2021.html "In-Line Transit Time Ultrasonic Flow Meters sales are set to be valued at US$ 337.5 Mn in 2021"). This compares with nine times for the S+P500 index and four times for the MSCI Europe index. Similar discrepancies are to be found on price/ earnings comparisons.

Meanwhile [stock market trading](https://www.financedigest.com/online-trading-and-stock-markets.html "Online Trading and Stock Markets") volumes are low, and overseas investors were net sellers in March.

There are several explanations as to why investors are willing to pay so much more for U.S and [European shares](https://www.financedigest.com/european-shares-kick-off-november-on-bright-note.html "European shares kick off November on bright note"), than for those of Japan.

First, [Prime Minister](https://www.financedigest.com/factbox-who-will-replace-uk-prime-minister-boris-johnson.html "Factbox-Who will replace UK Prime Minister Boris Johnson?") Abe’s kindergarten problems and Toshiba’s possible YEN 1 trillion ($9bn) 2017 loss on account of its Westinghouse nuclear division, are petty distractions at most.

For more fundamental reasons, a widely-reported market comment piece in March from Mizuho’s chief equity strategist, Masatoshi Kikuchi, is helpful. He complains of:

- A lack of growth [stocks](https://www.financedigest.com/mutual-funds-vs-stocks-which-is-better.html "stocks").
- A lack of bold restructuring stories [around value](https://www.financedigest.com/industrial-flooring-market-is-anticipated-to-expand-at-a-cagr-of-over-4-during-the-forecast-period-of-2020-2030-to-be-valued-around-us-12-4-bn-by-2030.html "Industrial Flooring Market is anticipated to expand at a CAGR of over 4% during the forecast period of 2020-2030, to be valued around US$ 12.4 Bn by 2030") stocks.
- Limited expectations around [labour market](https://www.financedigest.com/spains-labour-market-resilient-as-unemployment-drops-in-nov.html "Spain’s labour market resilient as unemployment drops in Nov") reform and corporate governance.

This [list will ring true to investors](https://www.financedigest.com/analysis-european-retailers-are-on-investors-naughty-lists-this-christmas.html "Analysis-European retailers are on investors’ naughty lists this Christmas") in Japan.

One cant help but bemoan the disappearance of the U.S from Trans Pacific Partnership (TPP), the completion of which would surely have given Abe political cover to undertake many of the structural reforms of his ‘third arrow’ of structural reform. The Regional Comprehensive Economic Partnership (RCEP), a tariff-only trade deal with China and ASEAN nations, is thin stuff by comparison.

A red herring that is often cited by Japan-bears relates to demographics: ‘Why invest in a country with shrinking and rapidly aging population?’

This argument is valid for smaller, domestic-focused socks. But global investors tend to focus on the TOPIX, which contains many large world-class exporters. For these a shrinking domestic market is an irritation, not a threat to their existence.

While I am sympathetic to Masatoshi Kikuchi’s attempts to explain the underperformance of Japanese [equities in recent months](https://www.financedigest.com/china-equities-weigh-as-em-sees-another-month-of-outflows-iif.html "China, equities weigh as EM sees another month of outflows – IIF"), I am inclined to believe that it is overly pessimistic.

An improved economic environment, with rising corporate profits, will surely encourage the [emergence of growth stocks and provide necessary cover for corporate](https://www.financedigest.com/corporate-wellness-market-insights-by-leading-companies-and-emerging-growth-till-2026.html "Corporate Wellness Market Insights by Leading Companies and Emerging Growth Till 2026") restructuring (including governance issues) and labour reform.

Importantly for the Japanese psyche, CPI inflation is now positive. The demon of deflation appears to have been vanquished. This can surely be attributed, at least partly, to the two other arrows of Abenomics – loose monetary policy from the [Bank of Japan](https://www.financedigest.com/dollar-hits-20-yr-high-as-yen-tumbles-on-dovish-bank-of-japan.html "Dollar hits 20-yr high as yen tumbles on dovish Bank of Japan") and fiscal stimulus.

Assuming Abe overcomes the kindergarten scandal, a [third term](https://www.financedigest.com/analysis-how-chinas-xi-accumulated-power-and-why-it-matters-in-a-third-term.html "Analysis-How China’s Xi accumulated power, and why it matters in a third term") in office looks likely given his close association with these policies. And investors like political stability.

Capital spending by [companies is growing – an indicator of improving confidence – as are wages](https://www.financedigest.com/french-unions-unanimously-sign-wage-agreement-with-edf-company-says.html "French unions unanimously sign wage agreement with EDF, company says"), currently up around 1% in nominal terms over a year ago, 0.5% in real terms. [Wage growth](https://www.financedigest.com/dollar-jumps-as-u-s-job-gains-wage-growth-beat-expectations.html "Dollar jumps as U.S. job gains, wage growth beat expectations") will boost domestic demand.

Given the improved macro-economic environment, and with ‘fingers crossed’ that the yen does not suddenly become a safe-haven currency for geopolitical reasons, the Japanese [stock market](https://www.financedigest.com/how-to-start-investing-in-stock-market.html "How to start investing in stock market") appears too cheap to ignore. It should be [attracting global](https://www.financedigest.com/global-equity-funds-attract-inflows-for-second-week-in-a-row.html "Global equity funds attract inflows for second week in a row") investors, particularly from U.S stocks.


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