Despite recent adjustments in the Japanese stock market, long-term foreign investors maintain a strong interest in Japan’s potential. The country’s efforts to escape its deflationary economy and improve corporate capital efficiency continue to make it an attractive market for international investors. To gain insight into this renewed interest in Japan, we spoke with two prominent figures in the global investment community: Kamal Bhatia, President and CEO of Principal Asset Management, and CJ Morel from Fiera Capital Asia.
Kamal Bhatia of Principal Asset Management, which manages assets worth $651 billion, expressed appreciation for the shift towards more shareholder-focused management in Japanese companies. He noted significant improvements in capital management quality, including dividend policies and share buybacks. Bhatia particularly praised the Tokyo Stock Exchange’s (TSE) role in driving these changes, stating that such public oversight benefits investors and instills confidence in the market’s future direction.
Bhatia highlighted the manufacturing sector as an area of particular promise, noting Japanese companies’ world-class technological capabilities. However, he pointed out that many firms still struggle with the “conglomerate discount” due to a lack of focus. He anticipates and welcomes further progress in business selection and concentration strategies.
While optimistic, Bhatia also acknowledged potential risks, including the impact of rising inflation on consumption and real wages. He noted that the Japanese market’s dependence on foreign investors could lead to adjustments if global economic slowdowns occur. Regarding the current yen depreciation, Bhatia observed varied investor reactions, with many adopting a “wait-and-see” approach until the Bank of Japan’s next move.
On the topic of private equity, Bhatia sees an increasingly active market in Japan, particularly among small to mid-sized funds. He expects an increase in IPOs and is especially interested in potential spin-offs from large conglomerates, which could broaden the pool of promising investment opportunities.
CJ Morel of Fiera Capital Asia shares this optimism about the Japanese market. Using a baseball analogy, Morel suggests that the current stock market rally is only in its third inning, with significant potential remaining over the next three to five years. Morel’s firm invests in Japanese stocks through global equity funds, focusing on bottom-up stock selection rather than country-specific asset allocation.
Morel identified four key factors driving Japan’s market attractiveness:
- Regulatory changes, particularly the TSE’s push for improved capital efficiency and shareholder returns.
- The new NISA (Nippon Individual Savings Account) system, which has surpassed expectations in attracting retail investors.
- Economic shifts, including Japan’s first experience with inflation in 25 years and accompanying wage increases.
- Geopolitical factors, with some investment capital shifting from China to Japan.
Morel views the Bank of Japan’s exit from negative interest rates as symbolically significant, expecting gradual rate increases to follow. However, he anticipates the yen-dollar exchange rate to remain stable until the Federal Reserve begins cutting rates.
Both Bhatia and Morel see opportunities in Japan’s software sector and expect continued improvement in Japanese companies’ Return on Equity (ROE). They also noted the potential in Japan’s private markets, with Fiera Capital planning to open a Tokyo office later this year to tap into the growing demand for alternative investments in Asia.
While risks remain, including the possibility of Japan slipping back into deflation, both investors believe that Japanese equities’ valuations remain reasonable by global standards. As Japan continues its economic transformation and corporate governance reforms, it appears poised to remain an attractive destination for discerning global investors seeking long-term growth opportunities.