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Japan stock market and funds review – time to look at Japan again?

We look at how Japan’s economy and stock market has fared, where the opportunities could be and how Japanese funds are doing.

Important notes

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.

In the early stages of the coronavirus crisis, Japan controlled the virus well, reporting low cases and relatively relaxed restrictions. Fast forward to 2021 and the story is quite different.

A resurgence in the virus meant Japan was forced to announce a state of emergency. This was an attempt to curb the spread and ease pressure on healthcare services. But as Japan’s vaccination rates were significantly lower than other developed nations, cases kept climbing. As a result, lockdown measures were extended and pushed onto other parts of the country.

This threw Japan’s economic recovery off track and raised questions around the country’s leadership.

Prime Minister Yoshihide Suga faced fierce criticism for his handling of the virus, delayed vaccination efforts and the decision to proceed with the Olympic Games. This meant his approval rating dropped to levels not seen for a Japanese leader in nine years. Ultimately this caught up with him and in September this year, he announced his resignation in order to focus his energy on dealing with the crisis.

The challenges faced by Japan could hamper recovery efforts in the short term, but there could be light at the end of tunnel.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice.

What’s happening in the Japanese economy?

Struggles with the pandemic have delayed Japan’s recovery efforts. The economy moved at a tepid pace across the second quarter (April to June) this year, hindered by low vaccine rates and state of emergency restrictions. The Olympic Games also did little to uplift the economy.

Despite these challenges, the economy is expected to pick up pace during the second half of the year. The International Monetary Fund (IMF) forecasted Japan’s economy will grow 2.8% in 2021. Although this is lower than previous estimates, it’s been bolstered by expectations of a strong second half of the year.

Recent accelerated vaccine efforts should help end the state of emergency, allowing the economy a chance to flourish along with a rebound in spending. A more stable political background is likely to mean improved government support for the economy too.

A recovery in overseas demand for Japanese goods could also be a significant driver of growth. Japan’s an important player in the semiconductor industry, producing critical electronic parts and devices. Demand for these goods surged recently, resulting in impressive export growth. In July this year, exports were around 37% higher than the previous year.

Japanese exporters could also welcome a new trade deal. Japan is now a member of the Regional Comprehensive Economic Partnership (RCEP), which is estimated to add $500 billion to global trade by 2030. This new partnership will look to lower tariffs for Japanese exports to China and South Korea, two of its three largest trading partners.

How’s the stock market reacted?

Japanese markets have lost steam recently since market highs earlier this year. While it’s had periods of strong performance, it’s generally lagged other global stock markets. This has mainly been driven by slow vaccinations and prolonged lockdown measures.

More recently though, vaccination rates have picked up drastically. Japan is now administering a million doses a day and is set to overtake the amount of people fully vaccinated in the US. The Japanese economy is regaining strength and markets look good value compared to others.

Japanese stock market vs other global stock markets

Past performance isn't a guide to the future. Source: Lipper IM to 30/09/21.

Annual percentage growth

Sept 16 – Sept 17 Sept 17 – Sept 18 Sept 18 – Sept 19 Sept 19 – Sept 20 Sept 20 – Sept 21
FTSE All-Share 11.9% 5.9% 2.7% -16.6% 27.9%
FTSE Asia Pacific ex Japan 15.8% 5.2% 4.1% 8.4% 13.9%
FTSE China 25.1% -2.3% -1.5% 33.5% -5.1%
FTSE Emerging 16.6% 2.0% 7.1% 4.7% 14.3%
FTSE Japan 11.4% 13.9% 0.3% 2.6% 17.6%

Past performance isn't a guide to the future. Source: Lipper IM to 30/09/21.

Markets are likely to be volatile at times though. New virus variants could impact Japan’s lockdown measures, despite vaccination efforts, and exports are at risk of slow overseas recoveries. Over the long term we expect the market to offer investment opportunities, but periods of volatility should be expected.

Where are the opportunities in Japan?

The Japanese stock market and economy have been hit with slow growth this year. However, Japanese companies have delivered strong earnings, indicating the market is good value currently.

For years the conservative mindset of Japanese companies has held back returns for investors. But this mindset served investors well over the pandemic. Low levels of debt and strong cash reserves meant roughly 60% of companies were able to leave dividends untouched. This wasn’t the case for the west where lots of companies were forced to cut or suspend dividends.

Japan’s Digital Agency was launched in September 2021 and is expected to push digital transformation in both public and private sectors. Digitising government departments and innovation in cashless payments, healthcare and education could benefit companies across a range of sectors.

Japan’s climate change policies could also lead to opportunities. Prime Minister Suga set ambitious targets to reduce emissions. Almost 2 trillion Yen has been invested into a Green Innovation Fund to support companies involved in green innovation over the next ten years.

New tax schemes are likely to be introduced as well, to encourage companies to respond proactively to these new policies. This could mean companies are viewed more positively in the market, fuelling potential interest from foreign investors. But cost and difficulties around clean power generation could hinder Japan’s progress, so a long-term view is needed.

How have our Wealth Shortlist funds performed?

Japanese funds on the Wealth Shortlist performed well over the last year as different investment styles came in and out of favour. This won’t always be the case though as investment styles can remain in or out of favour for some time.

At the beginning of this year, funds investing in companies undergoing a turnaround, otherwise known as ‘value’ focused funds, did well. As a result, funds investing in companies capable of above-average earnings growth, also known as ‘growth’ funds, took a hit. This style has underperformed value over the past 12 months.

No one investment style remains in favour forever though. The growth style of investing has picked up pace over the last few months, which has helped funds invested in these types of companies.

Investing in these funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

For more details on each fund and its risks, please see the links to their factsheets and key investor information below. All investments fall as well as rise in value, so you could get back less than you invest.

Man GLG Japan CoreAlpha, which sits at the deep value end of the spectrum, returned 37.3%* over the past 12 months. It performed well in the first half of this year but has slowed recently as growth investing has come back into favour.

FSSA Japan Focus, which is much more growth-focused, returned 19.4%, despite a shaky start to the year.

Both funds outperformed the IA Japan sector’s gain of 16.8%, but remember past performance isn’t a guide to future returns.

We think these funds could dovetail well in a portfolio. One has the potential to do well when the other struggles. Investment styles can fall in and out of favour, but we think both funds have the potential to perform well over the long term.

The chart below shows just how differently the funds have performed over the past year and how something like a shift in investment styles can affect performance. The funds can outperform when its style is in favour, but the reverse is also true. That’s why we think a well-diversified and robust portfolio should include a variety of investing styles, as well as different types of investments and geographies.

Japanese Wealth Shortlist fund performance

Past performance isn't a guide to the future. Source: *Lipper IM to 30/09/21.

The iShares Japan Equity Index is a ‘passive’ index tracker fund, where the managers look to match the performance of the broader Japanese stock market, rather than try to beat it. The fund invests in just over 500 companies, meaning it’s well diversified. As it’s simply tracking the wider Japanese stock market, the managers aim to keep the costs as low as possible.

Annual percentage growth

Sept 16 – Sept 17 Sept 17 – Sept 18 Sept 18 – Sept 19 Sept 19 – Sept 20 Sept 20 – Sept 21
FSSA Japan Focus 15.7% 20.1% 7.3% 23.1% 19.4%
iShares Japan Equity Index (UK) 11.3% 13.3% 0.1% 2.7% 15.9%
Man GLG Japan CoreAlpha Professional 18.0% 10.9% -5.6% -21.4% 37.3%
FTSE Japan 11.4% 13.9% 0.3% 2.6% 17.6%
IA Japan 13.2% 12.5% -1.2% 5.6% 16.8%

Past performance isn't a guide to the future. Source: *Lipper IM to 30/09/21.


Find out more about FSSA Japan Focus, including charges

FSSA Japan Focus Key Investor Information


Find out more about iShares Japan Equity Index, including charges

iShares Japan Equity Index Key Investor Information


Find out more about Man GLG Japan CoreAlpha, including charges

Man GLG Japan CoreAlpha Key Investor Information


How have other Japanese funds performed?

The average fund in the IA Japan sector grew 16.8% over the past year, compared to the 17.6% return for the FTSE Japan Index*. Remember, past performance is not a guide to future returns.

Funds focused on larger companies have outperformed those focused on smaller and medium-sized companies over the year. More recently smaller and medium-sized companies have performed better.

Investors have been willing to take more risk after accelerated vaccine efforts have opened potential opportunities for these types of companies. As a result, M&G Japan Smaller Companies has been the best performing Japan fund over the past 12 months.

The next best two performing funds over this period were Man GLG Japan CoreAlpha, which features on our Wealth Shortlist, and M&G Japan.

In contrast, Baillie Gifford Japanese Smaller Companies was one of the weakest funds in the IA Japan sector, returning -0.48% over the past 12 months. Weaker performance from the fund's consumer staple, technology and real estate investments held back returns.

Annual percentage growth

Sept 2016 - Sept 2017 Sept 2017 - Sept 2018 Sept 2018 - Sept 2019 Sept 2019 - Sept 2020 Sept 2020 - Sept 2021
M&G Japan 21.6% 3.9% -10.1% -9.0% 31.40%
M&G Japan Smaller Companies 24.1% 5.8% -12.2% 0.4% 43.6%
Baillie Gifford Japanese Smaller Companies 16.2% 31.9% -7.6% 23.1% -0.5%
FTSE Japan 11.4% 13.9% 0.3% 2.6% 17.6%
IA Japan 13.2% 12.5% -1.2% 5.6% 16.8%

Past performance isn't a guide to the future. Source: *Lipper IM to 30/09/21.


Find out more about M&G Japan, including charges

M&G Japan Key Investor Information


Find out more about M&G Japan Smaller Companies, including charges

M&G Japan Smaller Companies Key Investor Information


Find out more about Baillie Gifford Japanese Smaller Companies, including charges

Baillie Gifford Japanese Smaller Companies Key Investor Information


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    Important notes

    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.

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