A value investor's postcard from Japan
Our latest visit to Japan showed that while the pool of deeply undervalued companies has narrowed, the market still offers a diverse range of opportunities shaped by corporate reform, premiumisation and shifting consumer behaviour.
Autheurs
There are good reasons why Japan’s beauty market is the third largest in the world. Focused on skincare and anti-ageing, the country’s cosmetics brands are widely viewed as timeless. Yet wander into any branch of MatsuKiyo, say, or Welcia – the Japanese equivalents of a Boots or a Walgreens – and you would be forgiven for thinking otherwise. Everywhere you look, you are assailed by the hectic glamour of Korean ‘K-beauty’ products.
It is only once you have found your bearings, tuned out the noise and fought your way past all the eye-catching glitz that you will spot classic but currently unloved brands tucked away at the back of the store. All of which, of course, has a certain resonance for any committed deep-value investor – including this one, recently returned from a week of in-depth research meetings with a truly diverse range of companies in and around Tokyo.
With a pro-growth prime minister still in the early stages of her premiership, a raft of governance reforms gently bedding in and a stock market going strongly – at least until the US-Iran war began – this was an opportune time to visit Japan. We don’t often make investment trips but the opportunity to meet nine companies we’re already invested in and five showing up on our value screens as potentially very interesting made it worthwhile.
Hidden value
Value investors need to be able to make appropriate adjustments to the financial picture presented by a business to arrive at its true economic enterprise value (EV) and so understand if its shares are genuinely mispriced. When analysing Japanese stocks, cross-shareholdings and Treasury shares are especially important and can reveal a company to be much better value than it first appears.
Adjusting for treasury shares can be significant, as corporate Japan tends to have a reluctance to cancel these shares once they are bought back in the market, which can lead to important judgements that influence the valuation multiples. An important example in adjusting for crossholdings that is sometimes missed, meanwhile, is to adjust the EV for crossholdings net of tax on any corresponding profits; capital gains on holdings being subject to tax.
"Premiumisation" shift
As for the company meetings themselves, the dominant theme this time – and almost regardless of industry or sector – was the shift towards "premiumisation". This stems from the fact that when Japanese businesses specialise in a particular area, they tend to excel at it. Where they generally have done less well, however, is in identifying the threat to their business models from a large – and still growing – influx of low-cost players from China.
Ultimately, in response to this, Japanese companies appear to have decided not to compete on cost but instead play on their status as specialists. Be they a cosmetics company, a camera business or a steel manufacturer, say, many are shifting up to that top tier of customers – and, if a lot of economies in the world are indeed ‘K-shaped’ as many commentators now suggest, then that could well be a large and growing addressable market for them.
Change of mindset
Visiting Japan, you are continually struck by the high level at which the country functions – from its hugely efficient train and metro to its cutting-edge companies. On my trip, for example, I visited a lab run by a leading healthcare business, which was entirely "staffed" by lines of robots running diagnostic tests for the country’s major healthcare facilities.
That is one side of Japan – the bright lights of Tokyo’s bustling Shibuya ward, as it were – but everyone is acutely aware of the other: the significantly ageing population, which is more obvious in the quieter, greyer outskirts of the nation’s capital. Of course, that can work for businesses able to serve such a market, such as another company I met on my trip that is aware of the advantages of addressing both feminine care but also increasingly adult incontinence.
Postscript
All good postcards should have a postscript so let’s use this one to touch on the question of how far Japan’s value story has left to go. After all, we started to increase the Japan weight in our own global portfolios back in 2020 – and this only peaked out recently after we sold a couple of names that hit our fair values. How is the opportunity for value investors looking now?
The following chart shows the number of Japanese companies that have appeared in the cheapest 20% of the global market over the last 10 years, as measured by the ratio of their enterprise value to their 10-year average net operating profit after tax (EV/NOPAT). As you can see, while fewer Japanese companies appear in the cheapest 20% of the market today than back in 2020, the valuation of those that do is still in line with its 10-year mean.
Number of value opportunities in Japan has fallen from 2020 high
Source: Refinitiv, Schroders, July 2026. Chart shows number of Japanese companies ranking within cheapest 20% of MSCI ACWI index (count), and average valuation as measured by EV/NOPAT (harmonic mean).
The fact there is a smaller pool for us to fish in should come as little surprise given that, six years ago, the balance sheets of Japanese businesses tended to be chockfull of cash that was not being used at all. More recently, as is well known, the Tokyo Stock Exchange has brought in rules that companies should explain how they will work towards a price-to-book ratio of at least 1x – or else a very good reason why that is not the case, which has served as a catalyst for these cash-hoarding businesses to put at least some of that cash to work (although frequently with plenty of value still left to be "unlocked").
Importantly, though, despite fishing in that smaller pool, we are still able to find attractive opportunities in Japan – and from a very diverse set of companies as well. And, having returned to our screens to see what sectors are trading as cheap, we are seeing an array of interesting possibilities in the consumer space, such as consumer staples businesses that are struggling against low-cost competitors and will likely have to rethink their approach, as outlined above.
Finally, the screens run by the Schroders Global Value team are also uncovering plenty of ‘Japanese type" value opportunities, but increasingly in markets outside Japan. Whether it’s in consumer staples, technology, or real estate businesses, the screen is presenting us with a plethora of companies with Japanese style balance sheets (rich in cash and investments) but at pandemic-level valuations. In other words, even when the size of the Japanese opportunity set shrinks, we can still use the lessons and techniques learned from that market and apply them elsewhere; as the value opportunity set moves between regions and industries, so do the research priorities of the Schroder Global Value team.
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