Written by Joe Bauernfreund, manager of the AVI Japan Opportunity Trust (AJOT)
The macro environment in Japan presents reasons for optimism. The impact of the corporate governance reform agenda in Japan which has gained critical momentum and continued shareholder reforms provides a tailwind for investors.
The weak Yen makes Japan highly cost-competitive, both for tourism and manufacturing. Inflation has continued to creep higher having returned after a 30-year absence and with wage growth and increased spending, we see a more rational allocation of capital and improved productivity.
Although markets are unpredictable, we believe the dynamics set up a favourable environment for active stock selection. For example, Toyota Motors – one of Japan’s last holdouts to reform its balance sheet – will partially unwind its cross shareholding in Denso.
The Tokyo Stock Exchange’s announcement that it will add further pressure by calling on the over 1,000 companies in parent-subsidiary relationships or that have listed or equity-affiliates to increase disclosure around their rationale for having listed subsidiaries and their efforts to ensure their independence. At the start of 2024, the TSE continued its pressure by requiring companies listed on the Prime market to disclose key information in English.
A change in the fortunes of the Yen, could benefit investors. The Bank of Japan (BOJ) expansionary monetary policy over the past five years has weighed heavily on the Yen, which on an effective real exchange rate basis is at the cheapest since the early 70s. Even a small adjustment in monetary policy could lead to a stronger Yen. This could be a driver for attractive absolute returns. The cascade of events in 2023 are, in our view, a seminal moment in the long and winding road to unlocking the enormous value trapped in Japanese companies.
