Share your thoughts on our News & Insights section. Complete our survey to help us improve.

Investment ideas

Is there still room to run after Japan’s stock market rally? – plus 3 fund ideas

After Japan’s stock market reached a record high, we consider whether it’s still a good time to invest and what’s next.
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.

After decades of deflation and subdued growth, Japan recently reached an important milestone.

Japan’s stock market reached a record high in February 2024. Its previous high was set 34 years ago.

The question for many investors now is whether they’ve missed the boat or Japan’s stock market has further to go.

This article isn’t personal advice. All investments, and any income from them, can fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future. If you're not sure if an investment is right for you, ask for financial advice.

Is there room for Japan’s stock market to grow?

Japanese markets might have already been on an impressive streak, but this doesn’t mean all companies have reached a peak. Like the US, Japan’s partly benefited from a narrow group of stocks performing well over the past year.

MSCI Japan – since launch

Past performance isn’t a guide to future returns.
Lipper IM to 26/04/2024

The market’s been boosted by some of Japan’s largest companies, including car maker Toyota, semiconductor companies like Tokyo Electron, and financial services firms like Mitsubishi UFJ Financial Group.

In some cases, the valuations of these businesses (a measure of whether the share price reflects the future earnings and growth potential) has become stretched. But this doesn’t apply to the entire market.

Small and medium-sized companies, on average, currently look better value. And Japan’s market still looks good value compared with other global markets and its own history.

Share trading volumes can also be a sign of excessive bullishness, but data suggests trading levels haven’t reached unsustainable levels.

There also isn’t a huge spike in overseas investors buying up stocks – while some have returned to the market, it’s not at the point of extreme optimism.

Another turning point for Japan this year was to end its negative interest rate. Rates were raised for the first time since 2007, to a range of zero to 0.1%. Although, the Bank of Japan (BOJ) has held interest rates steady and, while the market has gone higher, UK investors haven’t felt the full benefit as the yen weakened further.

That said, it’s possible we could see rates rise again this year.

The BoJ’s expected to project inflation will hover around its 2% target for the next three years, supported by a backdrop of higher wages. Rates might have to follow if inflation persists.

This could be good news for economic activity, partly because there’s a huge amount of savings in Japan, most of which hasn’t been earning much interest. But higher rates could change this, boosting spending and stimulating the economy.

That said, higher rates could mean that cash becomes more attractive compared with shares for local investors as we’ve seen in the UK in recent years – it’s a fine line that the central bank will have to navigate.

Finally, Japan’s corporate governance improvements have been well covered, but remain relevant.

There’s been plenty of excitement over the past year around companies being encouraged to focus more on the returns on invested capital and to shareholders. While the fever could’ve peaked, the mindset of companies and management is changing, and this could have a positive impact over the medium to long term.

The risks shouldn’t be overlooked though.

After several false dawns, there will always be a risk Japan’s economy doesn’t fully recover – at least not overnight. If the effort to reinflate Japan, or inflation gets carried away, this could hurt. Inflation that’s too high could lead to higher-than-expected interest rates, and that could spook investors.

While Japan continues to offer opportunity, it should only be considered by investors with a long-term outlook and who can accept potential ups and downs. Investors should make sure they hold a diversified portfolio, filled with investments in other global stock markets and assets.

How to invest in Japan – 3 fund ideas

One easy way to invest in Japanese shares is through a professionally managed fund made up of lots of different companies. This could be through a fund that invests globally, or one dedicated to Japan.

Investing in 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 long-term diversified portfolio.

For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

Man GLG Japan CoreAlpha

Man GLG Japan CoreAlpha focuses on larger Japanese companies, some of which carry out business overseas.

The managers use a contrarian approach often known as 'value investing'. Their discipline in buying out-of-favour companies and gradually selling them as they recover sets them apart.

They tend to invest in a relatively small number of companies, meaning each one can make a significant difference to how the fund does, but it also increases risk.

We think this fund could work well in a global shares portfolio designed to provide long-term growth. Its focus on large companies means it could sit well alongside a Japanese equity fund focused on medium-sized or higher risk smaller companies.

FSSA Japan Focus

FSSA Japan Focus similarly invests in larger companies, but also invests in some medium-sized and more domestically focused Japanese businesses.

The managers look for high-quality companies that are dominant in their industries. The team tends to invest in relatively few companies, meaning each one can contribute significantly to returns. Again, this is a higher-risk approach.

The fund could help diversify a global investment portfolio. Its focus on high-quality companies with the potential for above-average earnings growth means it could work well alongside other value-focused funds.

iShares Japan Equity Index

iShares Japan Equity Index provides low-cost exposure to large and medium-sized companies in Japan.

It aims to track its benchmark, the FTSE Japan, by investing in every company in the index. Around 5% of the fund invests in smaller companies.

Smaller companies have greater growth potential, but can experience more extreme price movements. This can benefit the fund in the long term, but adds risk.

An index tracker fund is one of the simplest ways to invest. This fund could be a great, low-cost starting point to invest in Japan in a portfolio aiming for long-term growth.

Latest from Investment ideas
Weekly Newsletter
Sign up for Fund insight. Receive expert fund insights direct to your inbox every week, including research, investment articles and in-depth sector reviews.
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.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 29th April 2024