Is there still time to invest in Japan?

• The Nikkei 225 recently reached a record high – is there still time to invest in Japan?
• While a few names are trading at high valuations, Japanese markets remain good value in small and medium-sized companies.
• Rising wages, inflation and interest rates could boost spending and economic activity.

Kate Marshall, lead investment analyst, Hargreaves Lansdown:

“Japan’s most well-known stock market, the Nikkei 225, recently reached a record high. Its previous high was set 34 years ago. The question for many investors now is whether they’ve missed the boat or Japan’s market has further to go. Like the US, which has been led by the ‘Magnificent Seven’, Japan has benefited from a narrow group of stocks performing well, dubbed the ‘Seven Samurai’. This includes some of Japan’s largest companies, including car maker Toyota and semiconductor companies such as Tokyo Electron.

In some cases, their valuations have become stretched. But this doesn’t apply to the entire market. Small and medium-sized companies, on average, currently look better value. And, as a whole, Japan’s market still looks good value compared with other global markets and its own history.

Another turning point for Japan this year was to end negative interest rates. On Friday, the Bank of Japan 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, with inflation projected to stay around 2% over the next three years, supported by a backdrop of higher wages, we could see rates rise again later this year.  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 anything in interest, higher rates could change this, boosting spending and stimulating the economy.  However, higher rates could mean that cash becomes more attractive relative to equities for local investors as we have seen in the UK in recent years – it is a fine line that the central bank will have to navigate.

Japan’s corporate governance improvements have been well covered, but remain relevant. There’s been a lot of excitement around companies focusing more on shareholder returns. This fever may have peaked, but the mindset of companies and management is changing, and this could have a positive impact over the medium to long term.

How to invest in Japan – 3 fund ideas

Man GLG Japan CoreAlpha

The fund 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. The fund could work well in a global equity 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 smaller companies.

FSSA Japan Focus

This fund also invests in some larger companies, but also invests in medium-sized and more domestically focused Japanese businesses. The managers look for high-quality companies that are dominant in their industries. 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

This tracker fund 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. 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.”