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Old markets, new trends

Why we think investors should consider Japan

Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice. Once held in a SIPP money is not usually accessible until age 55 (rising to 57 in 2028).


Kate Marshall

Senior Investment Analyst

Return to growth

Japan’s a modern nation steeped in tradition. It's what gives the country its cultural stamp.

But it means Japanese companies have a history of resisting change. They tend to stick to what they know. At the same time, they're very efficient. So they do adapt quickly if they think a change is for the better.

Prime Minister Shinzo Abe set the wheels for change in motion when he was elected in 2012. He aimed to revitalise Japan's economy and make it more competitive. How? By encouraging companies to change the way they behave, and act in a way that's more beneficial for shareholders.

We thought this was a great time to invest in Japan. As well as change being in the air, our research showed Japanese shares offered excellent value. It meant they could be bought at a price which didn't reflect the companies’ growth potential.

We highlighted this to our clients. Since then, the market’s grown 127%, though past performance is not a guide to future returns.

Have I missed the boat?

We don’t think so. Despite this strong recent performance, our analysis shows Japan is still one of the most undervalued developed markets. This gives us confidence the market has further to go.

Company earnings drive share prices over the long run, but in Japan earnings have risen faster than prices. This means there could be further growth to come, though there are no guarantees.

Investing in Japan – fund ideas

What else is changing in Japan?

A changing labour market

Japan's unemployment rate is below 3%. But Japan’s workers are increasingly going to struggle to support its ageing population.

The government's already taking action to tackle this. It's proposed a visa that would allow more than half a million foreigners as unskilled labour into the country by 2025.

Businesses are taking action too.

Hiring, retaining, and developing good quality workers is becoming more of a priority. Full-time employment is now growing faster than part-time employment because businesses want to keep their best staff. They're investing more in learning and development, and doing more to improve the working environment.

This could improve productivity and ultimately benefit company performance.

Emerging inflation

Until recently, Japan struggled for decades trying to grow its economy. It suffered years of deflation (or falling prices). This is bad for companies. If customers know they can buy something cheaper tomorrow, they're less likely to spend money today.

Japan is now seeing inflation (rising prices). It's still low, below the Bank of Japan's target of 2%. But wages have recently been rising. And if consumers have more money to spend, companies are more inclined to raise prices.

Yamazaki Baking, for example, recently raised prices by an average of 3.1% on 70% of its bread and sweet buns. It might not sound a lot, but this doesn't happen often in Japan. It means other food producers could follow suit.

And Torikizoku, a restaurant chain, just increased the price of one of its main dishes by 6% – the first price rise for 28 years. Universal Studios and Tokyo Disneyland have also raised ticket prices. There could be more to come.

Better corporate governance

Improving corporate governance has been a key policy for Shinzo Abe. He introduced the Corporate Governance Code in 2015. It encourages companies to focus on sustainable, long-term growth for shareholders.

One aim is for companies to improve their ROE (Return on Equity – a measure of how much profit a company makes with shareholders’ money). So far it seems to be working. The ROE of the average Japanese company has recently caught up with European peers.

Japan still has some work to do. It’ll take time for a large scale change to take place. But ultimately it has the potential to make a real difference to shareholder returns. We think now could be a great time to invest for the long term.

How to invest in Japan - fund ideas

Dominic Rowles

Investment Analyst

Man GLG Japan CoreAlpha

Man GLG Japan CoreAlpha is one of our favourite ways to invest in Japan. It’s managed by Stephen Harker, one of the UK’s most experienced investors in Japanese shares.

Stephen Harker doesn’t follow the herd. He invests in companies pushed aside by other investors. It might be because something’s gone wrong, or they're in an unfashionable area of the market.

This gives him the chance to invest in shares at lower prices. Importantly, he has to think the company itself has potential to turn around and come back into favour.

It needs patience, but once this potential is picked up by other investors, the share price could rise. At this point he'll sell the shares for a profit and invest in the next overlooked company.

Businesses can stay out of favour for quite some time, and there’s no guarantee they’ll recover. We trust Harker to find more winners than losers over the long run.

Where are the opportunities?

Stephen Harker mainly invests in big Japanese companies. Some of the fund’s investments include Toyota and Honda.

He invested in the car makers when investors were worried about Japan's economy. Areas of the market more sensitive to the health of the economy were shunned. And the shares of some manufacturing companies looked great value.

But Japan's auto manufacturers are still among the biggest in the world. They're famed for quality and reliability. And Toyota and Honda don’t just sell cars in Japan. They sell cars in almost every country in the world. Once other investors appreciate this, share prices could rise.

Harker invests in a small number of companies. Each one can make a real difference to the fund’s performance, although it's a higher-risk approach. That’s one of the reasons you should only invest in this fund if you’re happy to set the money aside for the long term.

We recently interviewed Stephen Harker at our offices. You can watch the video below.

Read transcript

A superb long-term track record

Stephen Harker has performed much better than the broader Japanese stock market over the long term.

He’s grown investors’ money by 712%* over a career spanning almost three decades. He’s turned a £10,000 investment into £81,200. An investment in the broader Japanese stock market would have returned £22,400 over this time.

Our analysis puts the manager’s strong performance down to his ability to choose companies that have fallen on hard times, but gone on to perform well.

It's an approach we think will reward investors over a long period of time, though there's no guarantees and past performance shouldn’t be seen as a guide to the future. The value of investments will go down as well as up, so you could get back less than you put in.

Stephen Harker - career track record

Past performance is not a guide to the future. Source: *Lipper IM to 30/09/2018

Annual percentage growth
Sept 2013 -
Sept 2014
Sept 2014 -
Sept 2015
Sept 2015 -
Sept 2016
Sept 2016 -
Sept 2017
Sept 2017 -
Sept 2018
Man GLG Japan CoreAlpha 2.2% 7.5% 27.2% 18.0% 11.0%
FTSE Japan 1.2% 6.2% 31.3% 11.4% 13.9%

Past performance is not a guide to the future. Source: *Lipper IM to 30/09/2018

More information on this fund including charges

Man GLG Japan CoreAlpha Key Investor Information

Invest in Man GLG Japan CoreAlpha

Man GLG Japan CoreAlpha

Invest now


Jonathon Curtis

Investment Analyst

iShares Japan Equity Index

If you want to invest in a broader range of Japanese companies, you could consider the iShares Japan Equity Index Fund. It aims to track the performance of the FTSE Japan index. With over 500 companies, you’ll get plenty of diversification.

Car makers, banks and electronics are the biggest sectors in the Japanese market, so they form a large part of the fund. It invests in lots of well-known Japanese companies including Toyota, Sony and Nintendo. But it also invests in lesser-known, smaller Japanese companies. These could offer greater growth potential, but are higher risk.

The managers use their size and expertise to make sure the fund tracks the index as closely as possible. We think the low 0.11% annual fee should also help achieve this. Our charge to hold funds (maximum 0.45% per year) also applies.

Below you can see how the fund has performed over the last five years, but remember that past performance isn’t a guide to the future, and investments can go up and down in value, so you could get back less than you invest.

iShares Japan Equity Index - five year performance

Past performance is not a guide to the future. Source: Lipper IM to 30/09/2018

Annual percentage growth
Sept 2013 -
Sept 2014
Sept 2014 -
Sept 2015
Sept 2015 -
Sept 2016
Sept 2016 -
Sept 2017
Sept 2017 -
Sept 2018
iShares Japan Equity Index 0.2% 4.7% 32.4% 11.3% 13.3%
FTSE Japan 1.2% 6.2% 31.3% 11.4% 14.0s%

Past performance is not a guide to the future. Source: Lipper IM to 30/09/2018

More information on this fund including charges

iShares Japan Equity Index Key Investor Information

Invest in iShares Japan Equity Index

iShares Japan Equity Index

Invest now