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Fund sector reviews

Japanese fund sector review – what’s a weaker yen done to the stock market?

We look at the Japanese economy, stock market and Wealth Shortlist fund performance over the past year and what could lie ahead.
Japan stock market

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Japan’s going through a period of change. Decades-long deflation is over, interest rates are rising, corporate governance is improving, and one of its major stock markets recently reached a record high.

So, what’s driving the change? And will it continue?

This article isn’t personal advice. All investments rise and fall in value, so you could get back less than you invest. If you're not sure if an investment is right for you, ask for financial advice.

The path to rate rises

Japan is different to other major economies. It has wanted to push up inflation and see wages grow, and in turn raise interest rates.

At the same time, Japan looks like it’s becoming a more ‘normal’ economy again. This is because of a moderate rate of inflation, ability for workers to negotiate wage growth, and healthy stock market growth.

Prices in Japan have been rising since spring 2022 and inflation currently stands at 2.8% at the end of February, above the Bank of Japan’s (BoJ) 2% target.

This has given workers ammo to negotiate wage rises during this spring’s ‘shunto’ – Japan’s annual wage negotiations. The biggest employers recently agreed to increase wages by 5.3%, the highest increase since 1991.

One of the biggest announcements to come from Japan so far this year was the end of its era of negative interest rates. Rates rose for the first time since 2007, to a range of zero to 0.1%.

This might not sound like much to countries used to much higher rates, but it’s a big change for somewhere that’s only dealt with negative rates and deflation for years.

While rates rose, the BoJ was quick to signal that any more rate rises wouldn’t be rushed, especially until they’re sure inflation will stay around that 2% target.

The BoJ also got rid of its yield curve controls, aimed at capping bond yields to cap borrowing costs. This was an attempt to stimulate the economy alongside negative rates. But it did still maintain its policy of buying around ¥6tn (roughly £30bn) of Japanese government bonds each month.

As for currency, the Japanese yen has kept weakening. While this supports exports and international-facing businesses, it makes more domestically-focused companies less attractive to overseas investors.

Japan marches on

It’s been a strong start to the year for a lot of global stock markets. Japan is no exception and, so far this year to the end of March 2024, the MSCI Japan Index has grown 12.18%*.

This is a short timeframe though, and past performance isn’t a guide to future returns.

This follows a good year for the Japanese stock market. In fact, it’s been on a record-setting rally. The Nikkei 225, Japan’s best-known stock market, was recently the highest it’s been in over 30 years.

Over one year the MSCI Japan Index has returned 23.52% for UK investors. While this is an attractive return, it was hampered by currency movements as the British pound gained value against the Japanese yen. Japanese investors got a return of 43.51% from the same index.

A weaker yen has had other impacts, including contributing to higher inflation. For example, Japan imports a lot of resources, like oil and gas, and a weak yen makes them more expensive. This has helped keep inflation buoyant.

A weakening yen can boost the attractiveness of Japanese goods to overseas buyers though because it makes exports cheaper, benefitting companies doing a lot of exporting.

Elsewhere, there‘s still a big difference in the way ‘value’ and ‘growth’ companies perform.

Growth companies are expected to grow their earnings at a more predictable rate or have exciting growth potential, whereas the share prices of value companies don’t typically reflect their true worth.

Value under-performed growth for years and experienced its worst year during 2020 as COVID-19 took hold. However, the announcement of the first vaccine in November 2020 acted as a catalyst for a comeback in value investing.

Over the past year, the broader index of Japanese value companies has grown 32.59% while growth companies have returned 14.74%.

In terms of sectors, this means companies related to oil & gas, mining, banks, insurance, and transportation equipment have been some of the strongest performers.

On the other hand, pharmaceuticals, textiles, and air and land transportation have struggled.

Japan value vs growth - one year performance

Past performance isn’t a guide to future returns.
Source: *Lipper IM, to 31/03/2024

Overseas investors have been interested in the corporate governance reforms and have aided the performance of lower-valued companies.

The Tokyo Stock Exchange has been pushing to improve the corporate governance standards of Japanese companies. These changes have had a greater impact on companies with low valuations, as many were seen to have lower corporate governance standards.

Japan looks to be on a firmer footing, but it’s faced false dawns in the past, so there aren’t guarantees. The most likely risks to market growth include a slowdown in global growth, particularly in the US – relatively stable growth here has kept demand up for Japanese exports.

Any significant strengthening of the yen could also take the steam out of earnings, though this could see domestic companies do relatively better.

Aside from the economics, Japanese shares currently look reasonably valued, which could bode well for long-term investors. But, as always, periods of volatility should be expected and there are no guarantees.

How have Wealth Shortlist funds performed?

Japan’s stock market is often style driven. This comes down to a lot of Japanese companies showing traits and characteristics that define either growth or value investing. So, when there’s a rotation in style, it can impact performance.

Over the last year, value companies have outperformed growth, which has impacted the performance of Wealth Shortlist funds investing in Japan.

Remember, fund managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

For more details on each fund and its risks, use the links to their factsheets and key investor information. Both funds below invest in a relatively small number of companies, which means each one can have a meaningful impact on performance, but it does increase risk. Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own and they understand the specific risks of the fund before they invest.

The Man GLG Japan CoreAlpha fund performed strongly over the year to the end of March 2024, and grew 27.92% compared with 20.32% for the average fund in the IA Japan sector. Remember, past performance isn't a guide to future returns.

The return of value investing helped, and so did improved performance from companies and sectors more sensitive to the health of the economy, like financials. Some of the best-performing companies were also those making strides in corporate governance improvement. Shareholders have taken the news well and this benefited the fund’s performance.

Different investment styles will come in and out of favour though, so there will be times when the fund won’t perform as well. We saw this towards the end of 2023, when higher-growth technology companies performed better, in which this fund doesn’t have as much invested.

It was a tougher year for the FSSA Japan Focus fund. It lost 6.37%, but it did make a positive return in Japanese yen terms.

This fund uses a growth-focused approach, which held back performance. That said, in periods where a manager's style is out of favour, we like them to stick to their investment process, focusing on the longer term.

We have faith in fund manager Sophia Li and the FSSA team to perform well over the long term. When growth style investing is in favour, we expect this fund to outperform, though the reverse is also true.

Both the Man GLG and FSSA funds have a significant bias to the value and growth styles respectively, so it's likely they’ll continue to have periods of performance that are significantly different to the wider market in Japan.

One year is a very short timeframe. Managers with different strengths, styles and areas of focus will perform differently at different times in economic cycles.

This is why we think it’s sensible for investors to invest for the long term and regularly review them to make sure they’re right for you. It’s also important to consider a variety of managers with different investment styles and strategies to make sure your portfolio is properly diversified.

Annual percentage growth

31/03/2019 To 31/03/2020

31/03/2020 To 31/03/2021

31/03/2021 To 31/03/2022

31/03/2022 To 31/03/2023

31/03/2023 To 31/03/2024

FSSA Japan Focus






Man GLG Japan CoreAlpha






IA Japan






Past performance isn't a guide to future returns.
Source: Lipper IM, to 31/03/2024.
Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.
Written by
Kate Marshall
Lead Investment Analyst

Kate leads a team of Investment Analysts and is a member of the Senior Research Team. She provides oversight and challenge to fund selection across all sectors on the Wealth Shortlist, and votes on all proposals.

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Article history
Published: 22nd April 2024