Back in the ‘90s, visitors to Japan would return bearing tales of $200 melons and $5,000 cognac. Now, with that country’s bubble era long past, consumer prices are generally on par with other major global countries. One thing decidedly not on par: Japanese stock valuations. Most developed markets range from fully valued to expensive, even after the rough patch in September. While the Japanese market has recently seen a boost, stocks are still attractively priced, with a price-to-book ratio less than half that of the US. We think that’s too sharp a discount to pass up.
Can the rally be sustained? There are a number of catalysts that make us believe it can, reinforcing the case for increasing your Japan exposure:
- Earnings momentum – Worries about the impact of a new consumption tax led many Japanese companies to lower their earnings guidance for the year. Since then, a better-than-expected outcome has set the market scrambling to reprice.
- Pension reallocation – Japan’s Government Pension Investment Fund, the world’s largest pension plan, significantly increased its overall allocation to domestic stocks, from 12% to 25%. This will provide a huge market boost: every 1% increase in allocation could result in some $12 billion in flows.
- Continued central bank support – As the US Federal Reserve ends its massive bond-buying program, the Bank of Japan remains in full easing mode, including a surprise announcement last month to step up its purchases of government bonds and Japanese stock funds. The move sent the markets a clear, positive signal.
- Increased share buybacks – Japanese companies are more shareholder-friendly, as the government pushes to strengthen corporate governance. Stock buybacks have reached their highest level in six years in an effort to boost return on equity.
How to Play in the Land of the Rising Sun
If you’re looking for a simple way to invest in Japan, we suggest keeping it simple with a low cost ETF. The iShares MSCI Japan ETF (EWJ) provides diversified access to large- and mid-cap Japanese stocks, including blue chips like Toyota, Honda, and Hitachi.
While our investment thesis on Japanese stocks is independent from currency movements, we realize that some investors may want to address currency risk. For those who expect future depreciation of the yen against the dollar, we suggest the iShares Currency Hedged MSCI Japan ETF (HEWJ).
Finally, this week is the official launch of iThinking, a new BlackRock platform in which we’ll spotlight investment ideas through blogs like these and also share tools you can use to act on those ideas, including relevant iShares ETFs. Keep an eye here and also visit our new iThinking site.
Heidi Richardson is a Global Investment Strategist at BlackRock, working with Chief Investment Strategist Russ Koesterich. She also leads the iThinking initiative for iShares. You can find more of her posts here.