Like most major stock indices, the Nikkei 225 from Japan has had a tough run this year, down about 9% since January. But the S&P 500 has more than doubled in the same period, and there are a number of reasons why this outperformance could continue.
Why investing in Japanese stocks could be set to rebound?⛩️
Japanese profits are outpacing American ones
Since 2010, earnings per share from investing in Japanese stocks (orange line) have grown faster than those from investing in US stocks (blue line). In other words, Japanese companies have been delivering more and more value to their shareholders than their American rivals. You just have to keep in mind that lately the profits of Japanese companies have been more bumpy, and have been quite disrupted.
Growth in earnings per share (output) of S&P 500 and Nikkei 225 companies. Source: Bloomberg.
Japanese stocks are slightly cheaper than US stocks
The price-earnings ratio (P/E) of the Nikkei is currently 18,9, just below the S&P 500 ratio, which is 19,1. In other words, the market views the Nikkei as slightly cheaper, meaning it costs investors less money to make the same amount of profits.
Japanese inflation remains low
Buying in Japan could be an opportunity to make our investment in stocks in a country where inflation is not through the roof. Japan's inflation is now only 2,5%, which is well below that of the United States (9,1%), Europe (8,6%) or the United Kingdom (9,1%). . And with inflation still at acceptable levels, the Bank of Japan continues to stimulate the economy, with negative interest rates of 0,1%. Now, this could change if inflation continues to rise. But in a time of rising interest rates, Japan is doing something different, at least for the moment...
Comparison between inflation in the US and Japan. Source: Quick-FactSet
There is a lot of liquidity in the Japanese market螺
The Bank of Japan (BoJ) has injected massive liquidity into the economy through quantitative easing (QE), buying the country's government bonds and even its stocks to boost economic demand. This has also had the effect of depreciating the value of the yen, making exports cheaper for Japanese companies, which has helped boost companies' profit margins. It has also meant cheap borrowing rates for Japanese companies, so they have been able to undertake more projects and increase shareholder returns.
Total assets of the Bank of Japan: Source: Bank of Japan
Japan has improved its corporate governance️
Japanese companies have improved their corporate governance over the years, making their management styles more aligned with the interests of shareholders. To this end, expanded roles have been created for independent directors, sustainability issues have been addressed and restricted stock compensation packages have been introduced for executives to give them more skin in the game.
What risks does investing in Japanese stocks have?
The yen could affect prices
In the past, there has been an inverse relationship between the strength of the yen and investment in Japanese stocks. When the former weakens against the dollar (gray line), the latter tend to rise (blue line). But when the yen strengthens, the opposite happens. The general perception is that cheaper exports are good for investment prices in Japanese stocks. It's not an exact science, and the relationship doesn't always hold.
The Japanese yen in US dollars against the Nikkei 225 index.
Of course, the yen has fallen rapidly this year against the US dollar, which is benefiting from the Federal Reserve's most aggressive rate-hiking campaign in decades. Higher interest rates, after all, make the dollar more attractive to international savers and investors. And while the yen appears technically weak, the Bank of Japan could reverse course and raise interest rates if inflation starts to rise, likely prompting currency investors to buy back the yen and drive growth. its value.
Japan has the oldest population in the developed world
Japan has an average age of 48,6 years, and has fewer people under the age of 20 than all countries except Hong Kong and Singapore. Therefore, unless the country can attract more foreign workers, its economy could see its output decline over time compared to other countries. On the other hand, this could be good for Japanese stock investment prices, as slower growth could spur even more extreme QE measures by the Bank of Japan.
Japan population aging graph. Source: Wikipedia
The national debt is really high⚠️
Japan may be the world's third-largest economy, but its national debt is high: almost three times its gross domestic product. Add to that an aging population, and Japan could struggle to pay that burden in the long term.
Japan's national debt for the last 11 years. Source: Nippon.com
What opportunities are there in investing in Japanese stocks?
Spreading investments between different countries is a sensible way to act, both for protection and for the possibility of buying a new long-term opportunity. If what you are looking for is a set of large and medium Japanese values, you can look at the iShares MSCI Japan ETF (EWJ) or the Franklin FTSE Japan ETF (FLJP). If smaller companies are more your style, you also have the WisdomTree Japan SmallCap Dividend ETF (DFJ) or the XTrackers MSCI Japan Hedged Equity ETF (DBJP). Of course, if the yen weakens further, that would reduce the profitability for investing in foreign stocks. On the other hand, if the yen strengthens, the profitability of investing in foreign stocks will rise.