Investing in a changing Japan

Sustained inflation and the accelerating corporate governance revolution could lead to seismic shifts in consumer and corporate behaviour, creating opportunities for equity investors.

Consumer mindsets adjust to inflation

Japan’s economy has now sustained inflation over the last three years but the full impact may be yet to come. Having endured decades of deflation with little or no wage growth, Japanese consumers often delayed purchases—why buy today when it might be cheaper in six months. Sustained inflation has the potential to change consumers’ mindset towards spending; with positive wage growth and more than half of assets in cash, a pick-up in consumption could be coming.

Changing corporate behaviour is fuelling activity

Nicholas Weindling, portfolio of the JPMorgan Japanese Investment Trust plc, suggests the importance of the corporate governance revolution in Japan cannot be overemphasised. He describes the surprise of colleagues with decades of experience in Japanese equities as they witness changes they never thought would happen. Most recently, rather than foreign investors lobbying domestic companies to improve corporate governance, the pressure to change is coming from domestic sources, such as the Tokyo Stock Exchange (TSE). In addition, domestic asset managers are increasingly voting against corporate managements, something rarely seen before in Japan’s traditional corporate culture.

Companies are also increasingly focused on shareholder returns, which has led to record-high share buybacks and the fastest dividend growth in the world (off a low base). In a surprising new trend, Japan has become the second-largest market for foreign and domestic activism behind only the US. In the last two years, six companies in the portfolio have been subject to takeover bids compared to zero in last 20 years.

This activity could lead to improved corporate structures and higher valuations. For instance, Japanese companies have large net cash positions that are roughly three times those of US companies. Putting that cash to more profitable use could increase return on equity. Corporate margins in Japan are below many other regions, which may prompt companies to focus on shedding peripheral businesses to concentrate on their core businesses with higher margins.

New types of companies driving returns

These changes are already being reflected in the performance of companies in the JFJ portfolio. Some of the top positive contributors to returns this year are in industries where JFJ has previously had little exposure, such as Rakuten Bank, an online only bank that listed in last few years. JFJ has not typically owned many financial companies but the bank’s unique offering is disrupting incumbents and is also very sensitive to the changing interest rates environment.

IHI, a heavy industry company, was also a top contributor to returns and a type of company JFJ had never owned before. This key supplier to the Japanese military is likely to benefit as Japan invests more in defence and allows companies to make a greater profit. IHI’s aerospace business also offers strong recurring revenue. In addition, IHI has undertaken a major restructuring, getting rid of peripheral pharmaceutical and lawnmowers businesses, to better focus on its two core businesses.

JFJ has recently added to its existing position in Mitsui E&S, another example of a company that is streamlining its businesses by quitting engineering and shipbuilding. The company makes engines for ships and cranes used in ports and won a few contracts in the US in the last few years as the Biden administration sought to mitigate Chinese dominance in the sector. Only one sellside analyst covers the company, providing an opportunity for JFJ’s research analysts to gain an information edge.

Positioning for change

JFJ tends to have a growth and quality bias, which has often resulted in a valuation premium for the portfolio. In 2021 and 2022, the combination of a higher valuation in the portfolio and value stocks leading returns in the Japanese market negatively impacted performance.

The portfolio currently has the smallest valuation premium to the broader Japanese stock market ever, which reflects both market movement and a deliberate effort by the portfolio management team. Japan has been a strong value market for the last five years and value stocks have re-rated while growth stocks have derated.

In addition to this market movement, the portfolio management team has been actively looking to invest in businesses that are high quality or on the path towards becoming quality companies—before this is reflected in the share price. As Weindling puts it, the team is seeking good investments, not perfect companies, because once a big earnings ramp occurs, the shares may also have already appreciated.

The changing market and current mix of companies in the portfolio have contributed to JFJ’s recent strong performance in 2024 and in 2025 year to date. While past performance is not a guarantee of future returns, the JFJ portfolio management team remains enthusiastic about the exciting changes taking place in Japan and wide range of opportunities in the portfolio.

The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.

Summary Risk Indicator

The risk indicator assumes you keep the product for 5 year(s).¬ The risk of the product may be significantly higher if held for less than the recommended holding period.

Investment Objective

Aims to produce capital growth from investment in Japanese companies. The Company has the ability to use gearing to increase potential returns to shareholders. The gearing policy is to operate within the range of 5% net cash to 20% geared, in normal market conditions.

Risk profile

• Exchange rate movements between the pricing currency of the underlying overseas investments held by the Company and sterling (the base currency of the Company) can cause the Company’s NAV (in sterling terms) to go up as well as down. For example, if sterling appreciates relative to Japanese yen, the value of the NAV in sterling terms will be negatively impacted; if sterling depreciates, the value of the NAV in sterling terms will be positively impacted.
• External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
• This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
• This Company may also invest in smaller companies which may increase its risk profile.
• The share price may trade at a discount to the Net Asset Value of the Company.
• The single market in which the Company primarily invests, in this case Japan, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies.