Japan’s Economic Resurgence: Yen Volatility, Corporate Reforms, and Investor Opportunities

Suzanne Berkery


Japan's Economic Resurgence: Yen Volatility, Corporate Reforms, and Investor Opportunities


In April, the Yen sank to ¥160.17 against the dollar, the lowest level since April 1990, the main driver being the rate differential between the US and Japan. The yen has been on an almost continual slide since early 2021 as the Bank of Japan maintains ultra-low rates while the US Federal Reserve and other central banks have hiked borrowing costs.


The value of a country’s currency rises and falls relative to currencies elsewhere in line with the laws of supply and demand.  While the US Federal Reserve’s benchmark interest rate is currently set at 5.25-5.50 percent, the Bank of Japan’s (BOJ’s) equivalent rate is just 0-0.1 percent.


At a time when the rest of the developed world has been battling the worst outbreak of inflation in half a century, with a series of rate hikes, Japan for decades has been grappling with the opposite.


After years of deflation or low inflation, Japan is seeing its fastest price growth in more than 30 years. The Government of Japan’s aim is to transform the nation into a vibrant economy, and positive signs of growth are already seen across the board in areas such as wage increases, capital investment, and higher stock prices.


In March, the Bank of Japan ended its negative interest rate policy after 17 years. It has now raised its policy rate out of negative territory, establishing a new target range of 0.0-0.1%.


With recent commentary suggesting that US Federal Reserve will keep rates higher than previously anticipated, this volatility looks set to continue.


Over the last 10 years, both the Tokyo Stock Exchange (TSE) and the government have pushed to improve governance in Japanese listed companies.


Global investor excitement over long-awaited corporate governance changes and improved shareholder returns at Japanese companies have pushed share prices to record highs and seen increased activist investor campaigns in recent years.


In February, the Tokyo Stock Exchange finally surpassing the previous peak set in 1989 -34 years ago.


March 2023 saw the TSE publish a disclosure request focused primarily on enhancing corporate value. After initially focusing on stocks with a price-to-book ratio of less than one, the group is now urging higher valuation companies to maximise their cost of capital and profitability.


There are a growing cohort of Japanese companies embracing shareholder value maximisation through increased dividends and buybacks — a testament to a newfound commitment to investor returns.


January figures suggest 40% of stocks listed on the TSE’s Prime market have made good on its request for corporate governance disclosures – up from 20% in July. Meanwhile, dividends and share buybacks are increasing, management buyouts hit a new record high, and names like Toyota lead the drive to unwind cross-shareholdings.


Also, in January reforms around the Nippon Individual Savings account (NISA) provided a new unlimited tax-free period and increased investment limits to allow individual investors to invest in stock markets with the benefit of tax exemption.


Over half of Japan’s household financial assets of more than 15 trillion US Dollars are still in the form of cash and deposits.


Japan’s next step is to team up with the world’s biggest economy by appealing directly to US executives to invest in the Asian country’s emerging tech sectors including artificial intelligence (AI), semiconductors and clean energy.


Speaking in Washington at a lunch with American CEOs in April, Prime Minister Fumio Kishida said Japan welcomes American collaboration in “critical and emerging technology” and assured them that any investment would flow both ways.


More than a dozen executives including Microsoft’s vice chairman and president, Brad Smith; IBM (IBM) Vice Chairman Gary Cohn; Micron Technology (MU) CEO Sanjay Mehrotra; Boeing (BA) Defence, Space & Security CEO Ted Colbert and Pfizer (PFE) CEO Albert Bourla were in attendance.


Shortly before the lunch, Microsoft (MSFT) announced it plans to invest $2.9 billion to increase its cloud computing and AI infrastructure in Japan, and open its first Microsoft Research Asia lab in the country. It is the company’s single largest investment in its 46 years history in Japan.


As recently as 2020 acclaimed investor Warren Buffett announced his company, Berkshire Hathaway, had acquired stakes in Japan’s top five general trading companies Itochu, Marubeni, Mitsubishi Corporation, Mitsui & Co. and Sumitomo. These companies are not trading companies in the way we might think. They are very large, diversified entities that own many business interests both in Japan and globally. Berkshire has since raised its stake in each of the 5 firms to about 9% and could raise to 9.9% in the future. The 92-year-old Oracle of Omaha told CNBC that Berkshire plans to hold the investments for 10 to 20 years.


Navigating Japan’s investment landscape presents unique challenges to investors, notably the Japanese yen’s volatility.


To eliminate the currency risk for investors a number of Exchange Traded Funds (ETF’s) offer both exposure to Japanese equities and USD/YEN or EUR/YEN hedges. By earning the ‘carry’ in hedging instruments — a substantial margin bolstered by the disparity between U.S. and Japan interest rates — the ETF offers investors a way to capitalize on Japan’s economic resurgence while neutralizing FX risk.


For investors looking to gain exposure to Japanese equities, the following ETF solutions can provide comprehensive exposure (including the 5 trading companies Berkshire holds):

  • The Franklin FTSE Japan ETF (Ticker: FLJA), seeks to replicate the performance of the FTSE Japan Index It invests, directly or indirectly, primarily in equity securities of large- and mid-capitalization Japanese issuers. It has returned 8.49% YTD It is unhedged.
  • The Invesco JPX-Nikkei 400 UCITs ETF EUR Hedged offers broad exposure to Japanese equities. It comprises 400 companies listed on the Tokyo Stock Exchange. Selection is based on market capitalisation, trading value, return on equity, operating profit and qualitative factors relating to corporate governance. The index uses forward foreign exchange contracts to reduce the impact of fluctuations in the EUR/JPY exchange rate. It has returned 17.5% year to date.
  • The Wisdom Tree Japan Equity ETF (Hedged-JAPN)(Unhedged-JAPN.B) seeks to track the price and yield performance of the WisdomTree Japan Equity Index. The Index consists of dividend-paying companies incorporated in Japan and traded on the Tokyo Stock Exchange that derive less than 80% of their revenue from sources in Japan. By excluding companies that derive 80% or more of their revenue from Japan, the index is tilted toward companies with a more significant global revenue base. JAPN is the currency-hedged version of the ETF, which has returned 24.71% YTD. JAPN.N is the unhedged version and had returned 13.43% for the same period.


Originally published in The Sunday Times


Past performance is not a reliable guide for future performance.


Not all investments are necessarily suitable for all investors and specific advice should always be sought prior to investment, based on the particular circumstances of the investor.


The value of your investment may go down as well as up . You may get back less than you invest.