Exploring Japan’s recent resurgence

Fidelity’s Ed Monk recently caught up with Nicholas Price, portfolio manager of the Fidelity Japan Trust to explore Japan’s recent stock market resurgence and what investors can expect in 2024 and beyond. Here’s a summary of what was discussed. You can watch the full interview at the bottom of this page.

Why has Japan had a resurgence?

According to Nicholas, there are a combination of both macro and micro causes.

From a macro perspective, Nicholas said Japan is finally exiting over 20 years of deflation. The country is also starting to normalise its monetary policy. And from a micro perspective, there’s the corporate governance changes that The Tokyo Exchange Group has introduced.

“Companies have surprisingly and enthusiastically adopted this in the last 12 months,” said Nicholas.

Among these corporate governance changes, there are revisions to Japan’s Stewardship Code and Corporate Governance Code to encourage alignment between shareholder and corporate interests and to promote board accountability.¹

Nicholas highlights that Japanese companies are also making changes to their balance sheets.

“The average Japanese company compared to the US and the UK, would have 20 to 30% excess cash on their balance sheets. Now they’re adopting a sort of ‘de-equitisation’ that we’ve seen in the US and the UK. This has a significant impact for the market capitalisations of these companies and shareholder returns.”

How does being on the ground help inform investment decisions?

Nicholas has been based in Japan for many years. This isn’t always the case with overseas fund managers investing in the market.

He said that there are a variety of benefits of being on the ground.

“When I’m looking at a new sector or theme, it’s very useful to be able to visit all those companies in that space in a quick manner, to make an investment decision. More practically, if for example we are analysing a retailer, we can walk out the office and go in a Uniqlo store, or a Muji store and see how they’re developing a product.”

All the Fidelity Japan Trust analysts also speak fluent Japanese. Nicholas said these analysts will go out to industry trade shows and meet different companies and competitors and they will get a unique insight.

“You don’t get that from just meeting the investor relations team in London. That’s a real advantage,” said Nicholas.

What kind of companies do you look for?

“I’m naturally drawn to companies which are globally competitive and where I can see long runways of growth.”

He said that he finds this in the mid cap part of the market, particularly in technology and semiconductor materials - two areas which Nicholas said Japan has “really strong competitive advantage.”

In terms of style, I’m generally looking for companies which the markets haven’t really well researched yet, which are expanding into new growing markets.

“For example, one is a company called Osaka Soda, which produces high purity silicon gel which is used in the production of obesity drugs which are growing rapidly.”

• Learn more about the Fidelity Japan Trust

What can investors expect for Japan in 2024 and beyond?

Nicholas said the first half of 2024 was about the changes in corporate governance which has helped increase share buybacks and increase dividends. He expects this will continue into the second half of the year.

“Within the market itself, a lot of the mid cap parts of the market have lagged the overall market. We’ll see a bit of catch up of those names as the valuations are at very low levels and earnings growth is quite good. Those will be good catch-up parts for the second part of the year and will benefit the trust performance,” said Nicholas.

Watch the full Fidelity Japan Trust video

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Please be aware that past performance is not a reliable guide indicator of future returns. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The shares in this investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.