The Global View

Institutional Investors: Don't Count Out Japan

Concerns About Asia Overall, Yen Exchange Rate and Growth May Be Overblown

And Mask Bright Spots, Namely Small- and Mid-Cap Japanese Equities

BOSTON, MA–(Marketwired – Mar 7, 2016) – Conventional wisdom says Japan’s economy continues to flounder. Many commentators say earnings at Japanese companies are starting to decline given recent yen strength, and they predict the country’s economy will be swept up in macroeconomic instability rippling away from China’s markets.

They cite last quarter’s 1.4% drop in GDP and stalling corporate profits as telltale signs it is too late to invest in Japan.

These anxieties surrounding Japan may be overstated — and costly, says Cambridge Associates. Other indicators — such as corporate governance reforms, attractive valuations for Japanese equities and healthy gains in areas such as employment and tourism — point to opportunities for astute institutional investors.

“The reality is that many Japanese small- and mid-cap stocks are less exposed to factors like exchange rate swings and a volatile China — and they can provide opportunities. And, despite limited economic growth, many of these companies continue to become more efficient, channeling profits and cash balances back to investors via dividends and buybacks,” says Wade O’Brien, Managing Director in Global Investment Research at Cambridge Associates.

Sectors in the Japanese economy worth looking at include retail, health care, tourism and real estate, he says. They are somewhat buffered from regional and global macroeconomics events.

Governance Reforms Bolster Japanese Businesses’ Profitability

“In fact, returns on equity for many Japanese companies are steadily rising,” says O’Brien. “The return on equity for the Japanese main equity index was in the low single digits in the early 2000s and around 4% in early 2010 — today it is at 8% or higher.”

He says Japanese businesses can benefit from the effects of “Abenomics” — the reforms implemented by Prime Minister Shinzo Abe starting in 2012. Because of Abenomics, companies are more focused on profitability than they have been in the past, and the recent resurgence in Japanese equities, which returned 9.9% in 2015, has been driven mostly by earnings growth. That differs from many other markets, where higher valuations have accounted largely for earnings growth.

Companies are also increasingly attuned to shareholder concerns instead of mainly focusing, as they traditionally have, on those of other stakeholders like employees, he says. While Japanese companies sit on over 300 trillion yen in cash — equivalent to over 50% of market capitalization — share buybacks are happening more frequently. “Governance reforms and a newfound focus on returns mean that payouts to investors are rising,” he says.

“The benefits of Abenomics for investors are not limited to a cheaper currency,” he adds. He cites falling tax rates and more shareholder-friendly management practices as factors behind projections that Japanese companies may grow earnings by around 13% in fiscal year 2016 and another 8% in 2017.

Yen Depreciation Not the Only Source of Strong Returns — the Domestic Market Plays a Big Role

A common critique of recent strong returns from Japanese equities is that a weaker yen has driven the returns — and a swift reversal would present a headwind to companies and their investors. Indeed, Japanese companies with high foreign revenue share have grown profits 10 percentage points faster than those with less international exposure.

These anxieties surrounding Japan may be overstated -- and costly

“However, looked at differently, the yen’s impact on earnings growth may be fading. More than 80% of the Japanese index’s revenue is either generated domestically or from countries whose currencies have not appreciated significantly against the yen. And sectors with virtually no foreign revenue — such as telecoms, utilities and financials — have recently generated earnings growth as high as, if not higher than, sectors with large foreign exposure like industrials and autos,” he says.

He also points out that investors tend to conflate GDP growth with investment opportunity — which may be misguided. “Japan’s GDP will never grow at the same rate as some other countries’, simply due to demographics. It may be a mistake for investors to let Japanese GDP growth dissuade them from exploring Japanese stocks,” adds O’Brien.

Small Stocks, Sizable Opportunities?

Given their attractive valuations, greater domestic focus and potential for further improvements in governance, some small- to mid-cap Japanese equities may offer attractive returns to savvy investors.

“Sectors such as retail, tourism, real estate and health care should be well placed to tap rising employment, consumer spending, and inflation,” he says. “They can also provide some diversification if the yen’s recent appreciation continues, as the majority of their revenue is sourced domestically.”

O’Brien points out that these are not “beta” trades: “Due diligence on the part of the investor is essential to find value in Japanese equities, and some active managers may be especially equipped to find attractive opportunities.”




For more information or to speak with Wade O’Brien, please contact Eric Mosher, Sommerfield Communications, Inc., at +1 (212) 255-8386 /
This press release is provided for informational purposes only and is not intended to be investment advice. Any references to specific investments are for illustrative purposes only. The information herein does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. This release is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Past performance is not a guarantee of future returns.
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About Cambridge Associates
Founded in 1973, Cambridge Associates is a provider of independent investment advice and research to institutional investors and private clients worldwide. Today the firm serves over 1,000 global investors and delivers a range of services, including investment advisory, outsourced investment solutions, research and tools (Research Navigator and Benchmark Calculator), and performance monitoring, across asset classes. Cambridge Associates has more than 1,200 employees serving its client base globally and maintains offices in Arlington, VA; Boston; Dallas; Menlo Park, CA; San Francisco, CA; London; Singapore; Sydney; and Beijing. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information about Cambridge Associates, please visit