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How Japanese companies could help boost your income

Overlooked for decades, Japanese shares are back in favour – and there are reasons to expect the trend to continue

03/04/2024
Photo of Mount Fuji with pagoda and cherry blossom in foreground

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For the past three decades investors typically overlooked Japan when wondering where to invest. The boom of the 1980s led the local stock market to peak in 1989. But the bubble burst and shares have failed to recapture those heights ever since. Until now.

Japanese shares are squarely back on investors’ radar and finally surpassed that 1989 high in February 2024*. So what’s changed?

One important factor is the campaign launched last year by Tokyo Stock Exchange for companies to focus on achieving sustainable growth and on raising corporate value.

There are many ways companies can do this. Initiatives could include increasing investment in research, employee training, new equipment and facilities, or restructuring the business.

These measures may take time to produce results but should ultimately lead to sustainable growth and a more valuable company.

Another way to enhance corporate value is to increase returns to shareholders, either via dividends or buybacks (whereby the company repurchases its own shares). Higher pay-outs typically make a company more attractive to investors seeking income.

The good news is that Japanese companies are well-placed to take some or all of these steps. The percentage of companies that are “net cash” (i.e. whose cash on the balance sheet is greater than their liabilities) is 44%. That gives those companies scope to invest in their business, or increase returns to shareholders, or both.

Chart showing % of net cash companies in Japan, US and Europe

This could make Japanese companies an appealing proposition for investors who are seeking income, while also obtaining growth from their investments.

The call from TSE is already being heeded by companies. As the chart below shows, share buyback announcements have been steadily increasing.

Chart showing share buyback announcements by year

There are other factors supporting the Japan story too. Among these is the return of inflation. After three decades of low inflation, and even deflation, the current return of mild inflation is very welcome in Japan.

Deflation leads companies and consumers to delay investment and put off purchases; there’s little point buying something today if it will be cheaper tomorrow. By contrast, moderate inflation gives companies the confidence to invest for the future and also spurs consumers to spend.

Rather than facing a downward deflationary spiral, Japan may now be entering a sustained period of higher corporate investment, wage growth, and increased consumer spending.

All of the above helps to make Japan an attractive hunting ground for investors currently, particularly for those seeking income and the prospect of long-term growth.

*On 22 February for the Nikkei 225 index.

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Please note past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

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For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

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