After a ten-year Nikkei bull run, is there more to come? by Ramsey Crookall

In February this year, Japan’s major equity market benchmark, the Nikkei 225 index, broke through 39,098 after a ten-year bull run. Its previous record of 38,915, set in December 1989, marked a gap of approximately 34 years.

After hitting its 1989 peak, banks wrote off trillions of Yen in bad debts, and share prices sank before the previous Prime Minister, Shinzo Abe, introduced a series of market-boosting measures in 2013, in what is now termed Abenomics.

What’s been driving the recent performance of Japanese shares, and how can foreign investors gain access to this market?

Japan is emerging from a negative interest rate environment when many other major economies are moving in the opposite direction. While this is causing volatility, it is also putting Japan’s markets in the spotlight. The re-emergence of Japanese equity market indices has prompted many investors, many of them foreign investors, to revisit the Japanese investment case. Famous investor Warren Buffet, for example, has recently taken several sizable positions in Japanese firms.

Domestically, while some older Japanese people are reluctant to invest in equities, owing to their memories of the bubble bursting in 1989, many younger investors are less wary. In fact, hoarding cash over many years hasn’t been eroded by inflation in a deflationary environment. Estimates suggest that even now, approximately 55% of individual savings remain in cash.

The Japanese central bank, the Bank of Japan (BoJ), is now tasked with maintaining price stability with a target inflation rate of 2%. Furthermore, authorities are encouraging domestic equity ownership via a tax-efficient vehicle similar in structure to the UK’s ISA, the Nippon Individual Savings Account (NISA). Higher interest rates could also bring about positive wage growth, which, with high savings levels, could lead to higher consumption.

Until recently, corporate Japan largely retained earnings in cash, opting not to reinvest or pay dividends. Additionally, there were also a large number of cross-holdings aimed at preventing takeovers and shareholder activism. Regulatory changes have significantly impacted corporate governance standards and stock market listings, including pursuing independent board directors to achieve a top-tier listing.

Over 90% of companies listed on the TSE now have independent directors, up from just over 6% in 2014. Companies must now declare cross-shareholdings and assess whether they remain appropriate, resulting in an increasing presence of activist investors. The most significant rule, however, is imposed on companies trading below their book value, requiring changes to increase that ratio and disclose it publicly. Failures may lead to potential demotion or delisting. The latter reform, which is still accelerating, encourages firms that may have hoarded cash to go out and spend it, whether via reinvestment or by returning it to shareholders through increased dividends or share buybacks.

At Ramsey Crookall, we can help you gain exposure to the exciting Japanese market through our ability to trade and hold direct Japanese equities, as well as a variety of collective vehicles such as exchange-traded funds or UK-listed investment trusts. If you would like to find out more, please contact a member of our Stockbroking team to discuss.