Japan has often been described as the cheapest value market in the world, so how has been doing in the recent value rally? Some of the things that we often hear about Japan are things like, it’s a warrant on global growth, it’s a cyclical, you should buy it now or it looks like a cheap market so, you should buy Japan or some people at the moment say, Japan has had a relatively good Covid experience in that it was relatively less affected than other countries, fortunately. All of these things might mean that you might want to buy the Japanese market on a six-month view or a 12-months’ view but are these really good reasons to think about buying into companies in the long-term. In Japan there is nothing short of a corporate governance revolution happening. Experts who have been investing in Japanese equities for up to 20 years are seeing developments which they never expected to see in their investment careers.

A lot of the things started back in 2014, when the then Prime Minister Abe put in motion a corporate governance code and a stewardship code and since then, momentum has really been building. What is noticeable is how dividends and share buybacks have been progressing. And there has been steady progress each year. Crucially, even last year, the pandemic year, we really didn’t see any major shift on this. While in the UK there are companies that had to stop paying dividends or they were told to stop paying dividends by the government in sectors like oil majors or banks and so on, Japan didn’t see any of that and Japanese companies have extremely strong balance sheets. Over 50% of them have net cash on their balance sheet. The equivalent figures in Europe or the United States are about 15%. So, it is a dramatic difference and there’s clearly a lot more to go for. Commentators expect that to play out over many years. Not only in terms of shareholder return, but also in other areas.

Many investors believe that the Japanese stock market had a huge boom in the 1980s, that it suffered a mammoth bust at the end of that period and that it has malingered ever since under the weight of deflation and a shrinking population. Certainly, deflation and demographics have been a drag on the economy. Yet those returns of close to 10% a year illustrate the maxim that a stock market does not always reflect what is happening economically.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This article is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of June 2021 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.