Three Minutes on Japan

Portfolio Manager Shuntaro Takeuchi gives his take on the outlook for investor returns in Japan’s equity markets.

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As I gauge the outlook for Japan’s equity markets and reflect on their recent impressive performance it’s clear to me that there are a multitude of forces at work.

Firstly, Japan’s markets have benefited from multiple expansion over the last 18 months. Domestic investors have flooded the market encouraged by the capital reforms that corporates have made which have yielded significant benefits for shareholders largely in the form of increased stock buybacks and dividends.

It’s worth noting that even with a record high of share buybacks by Japanese corporates last year, that total amount was still less than the value of Apple’s 2023 buybacks. On top of that, about half of Japanese listed companies are net cash. So we think the potential for enhanced returns from buybacks and dividends will remain a force for a while though to greater and lesser degrees across sectors and industries.

Secondly, Japan has earnings growth momentum. This is important because over the past 10 years the majority of shareholder returns have come from EPS growth and resulted in Japan being the best performing market by U.S. dollar returns, with the exception of India, among popular equity allocations outside of the U.S.1 Japan’s earnings growth isn’t closely connected to its GDP growth, which compares poorly with other developed markets. Instead, the financial health of Japan’s corporates is more directly tied to exports, world trade and the global economy. We think Japanese corporates are generally in good shape and the yen’s ongoing weakness to the dollar is also a macro tailwind for earnings. 

Earnings Growth Momentum

From some of our recent company visits, a couple of other things are also clear. One is that inbound tourists are coming back, and in full. Tourism-related spending has surpassed the all-time high set before the pandemic and that’s without the full recovery of spending by Chinese tourists who represent the largest component. We also sense that while there’s increasing interest in Japan from global investors they are still very much under-invested in the market. So that has a long runway.

Looking ahead, we remain positive on Japan’s markets and we see the drivers that have strengthened in recent months staying strong. We would also highlight the long-term potential of Japanese small caps. The Nikkei 225, which consists of larger cap companies, has traded at 10-year highs in terms of valuation this year while broader Japan indexes which include mid-cap to small cap companies have traded around 10-year median averages.2 So we believe there is a lot of upside in the small cap and mid-cap space.

Of course, we don’t invest in large caps or small caps for the sake of their size. We always invest in companies that have superior growth over the mid to long term.


Japan’s Qualities and How to Tap Them

  • Japan offers attractive growth companies across the market-cap spectrum.
  • Japanese companies are well-positioned to benefit from growth in incomes and rising productivity across Asia.
  • Bottom-up stock selection is key to distinguishing between superficial and substantive governance improvements across corporate Japan.
  • A focus on quality business models and quality management teams at reasonable valuations can lead to attractive risk-adjusted returns in Japanese equities through market cycles.

Shuntaro Takeuchi
Portfolio Manager
Matthews Asia


1As of May 3, 2024; 2as of May 6, 2024. Source: Bloomberg




The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.