Japan funds boom as stock market hits record high

The Japanese stock market reached a 34-year high last month, and investors in the Asian market are getting the best news they’ve heard in decades.

The Japanese Nikkei 225 has risen 42.5 per cent over the last year, compared to the 1.2 per cent growth in the FTSE 100 over the same period.

Last month, the Nikkei index even surpassed its previous all-time high of 38,915.87, set in December 1989. While it has since fallen slightly below that, it remained above the 40,000 mark for most of last week.

The two key catalysts for this surge have been a range of significant governance reforms, and a move away from the deflationary environment that has plagued the country for decades.

Japan has famously had incredibly poor corporate governance, with shareholders given little consideration, but new measures from the country’s stock exchange and government have pushed to change this.

The Tokyo Stock Exchange introduced a new index last year called Prime, which favours higher returns on equity and shareholder engagement, with companies now eager to improve their governance to boost their prestige.

Meanwhile, the macroeconomic environment has finally shifted to the point that Japan’s inflation rate looks far more like the average developed market (at around two per cent) rather than hovering as zero as it has for much of the last 30 years.

Japan funds have been paying off from this surge. Just this week, the AVI Japan Opportunity trust reported a 15.8 per cent rise in net asset value throughout 2023, compared to a 4.3 per cent decline in its portfolio the year before.

The trust reaped in £25.2m of profit before tax, compared to a £6.6m loss in 2022.

Numis analysts Ash Nandi and Gavin Trodd said the trust was “an attractive way to access the Japanese market,” complimenting its activist approach that has tried to unlock value from firms with poor corporate governance and capital misallocation.

“Over the last decade, Japan has initiated a comprehensive corporate governance improvement programme, seeking to improve the business and governance practices of companies in the region,” they added.

Meanwhile, the Abrdn Japanese equity fund has grown 12.1 per cent in the last year, Chern-Yeh Kwok noting the strong technological innovation comes from the country.

“Japan has a long-standing and deserving reputation for technological excellence,” he said. “It continues to be at the forefront of innovation, particularly in robotics, artificial intelligence, biotechnology, health-care and clean energy.”

He argued that the deflationary mindset of the country was “gradually changing”, resulting in a “firmer domestic outlook for companies”.