Our Opinion: 2025
Rediscovering Japan
Foreign investors can’t get enough of Japan. Overseas buyers bought a record net ¥8.2tn (£42bn) of the country’s securities in April as they sought a safe harbour from chaos in US markets. Meanwhile, share buybacks by Japanese firms are soaring. Firms on the local Topix index announced ¥3.8tn (£19bn) of buybacks in April, a 200% year-on-year jump. Japanese firms have long been accused of excessive cash hoarding, but years of pressure for corporate Japan to pay more attention to shareholders is finally bearing fruit.
Foreigners now own almost a third of the Tokyo stock market, up from 5% in the 1970s. Haunted by the implosion of the 1990s asset bubble, locals have been much more cautious than foreigners about buying back into the local market. 54% of Japanese household assets are in cash, compared with 31% in the UK and 13% in America. Japanese shares have several attractions. For one thing, they are still relatively inexpensive, at least compared with US stocks. The Nikkei 225 trades on a price-to-earnings (p/e) ratio of 18.1, compared with 24.6 for the S&P 500. On a price-to-book-value basis, Japan trades on a reasonable 1.4 times, compared with 2.1 for Europe and 4.8 for the US. There is also reason for optimism on the domestic front. In March, the annual wage negotiations between major unions and businesses yielded a 5.46% nominal increase, the highest wage hike in over 30 years. With extra cash in their pockets, consumers – historically a weak link in deflation-prone Japan – could be poised to fire up the economy.
The Japanese yen appears the currency most likely to rally as the dollar structurally weakens. A strengthening yen is good news for foreign investors, but a mixed bargains relatively inexpensive for the Topix, which is full of exporters that tend to rally when the yen falls. Local property and infrastructure are preferred because of their high dividend yields and relatively stable cash flow.
Interest from foreign investors is driving up valuations for flats in Tokyo. On a price-to-annual-rent basis (similar to a stock p/e ratio) Tokyo property had historically hovered around 20, according to data from research firm Tokyo Kantei. However, prices have now risen for five years in a row, pushing the ratio to 28.93 last year. Indeed, with rents in Tokyo yielding just 1.88% of sales prices, local investors would do better by just buying the 2.2% yield on a 20-year Japanese Government Bond.
11th June 2025
