Subscribe

Follow

Related Content

All-cap versus mid- and small-cap Japanese equity index total returns (in £)

Forward P/E valuations and dividend yields (x unless stated)

Source: Refinitiv, Edison Investment Research. Note: Valuation data as at 1 November 2019, based on Datastream indices.

The charts show Japanese equities have provided solid returns for UK-based investors over the past five to six years, with smaller and mid-cap stocks mildly outperforming the broad-based Tokyo Stock Price Index (TOPIX).

While this has in part been boosted by the relative weakness of sterling since mid-2016, it also represents something of a return to favour for the world’s second-largest developed stock market, after the best part of two decades in the wilderness. Japanese equities are not immune to current global macro headwinds, such as the US-China trade war (a particular worry given many Japanese companies manufacture in China) and the slowing economy, but their relatively low valuation versus world markets provides a measure of support.

Currently only the UK – which has been deeply out of favour because of the prolonged period of Brexit uncertainty – is more cheaply valued on a forward P/E basis compared to its 10-year average. Furthermore, corporate governance reforms in Japan are boosting returns to shareholders through measures such as share buybacks and dividend payouts. As a result, the historically lowyielding market now has a dividend yield higher than the US, and only a little below the regional and global averages, providing a further underpinning for total returns in what may continue to be a volatile period for share prices.

Subscribe