During a recent trip to Japan, I felt fortunate to be able to catch the country’s cherished “hanami,” or “flower viewing” season. The delicate and beautiful blossoms were on full display then, although only briefly before rain showers left them looking like snowfall on Tokyo streets. Nonetheless, it was great to be back and traveling through post-COVID Asia, which is bustling with the return of both leisure and business visitors.
Tourism to Japan has been surging, with entries rising exponentially since the country reopened last fall. In March, Japan notched 1.8 million foreign visitors, and it is now on track to receive 20 million visitors this year.1 Besides the welcome rebound in arrivals, renowned investor Warren Buffet’s recently renewed attention to several Japanese trading giants has meant more positive developments for Japan.
The value-investing guru’s Japan stock picks are basically conglomerates with reach into many sectors represented in the country’s broad market. In particular, these represent the top sector of the FTSE Japan Capped Index, industrials (22.6%), as well as in the index’s fourth largest sector, financials (10.5%).2 Year to date, the index is up nearly 7%, led by industrials.3 The positive potential diversification story has naturally piqued investor interest. In our analysis, there are more reasons to consider a Japan allocation for the long run.
A reboot to Japan’s semiconductor industry
Japan is set to join other countries in a buildout of leading-edge semiconductor capabilities, which is being prioritized following the pandemic’s halt to global commerce and rising trade conflicts. Japan’s Rapidus—a newly formed foundry for advanced chip manufacturing, a quasi-public venture with IBM Research—is set to receive more government funding for microchip fabrication plants (fabs) in Hokkaido. Japan plans to differentiate its business from other foundries such as Taiwan Semiconductor Manufacturing Company (TSMC), Samsung and Intel with an impressive consortium of its own that has corralled major firms such as NTT, SoftBank, Sony and Toyota. The country’s strong manufacturing ecosystem of materials, equipment and engineering talent will help Japan-based fabs.
New policies to tackle aging demographics
The issue of graying societies is not exclusive to Japan. Amid China’s declining birth rate, the country’s colleges extended spring break this year to give students more time to “learn to enjoy nature…and enjoy love.” For Japan, there is also some optimism in a host of new measures aimed at incentivizing people to have children. These plans include:
- Broadening free school meal programs
- Student loan repayment support for expecting families
- An expansion of scholarships and child support payments, which were previously subject to income caps, to all families
- Additional income for fathers who take paternity leave, matching their post-tax salary
- Expanded housing support for families with young children
Wages and pay equity
The Bank of Japan’s dovish stance, announced on April 28, to support wage growth through continued monetary easing sent the yen lower while lifting stocks. This may help Japanese manufacturers as a weak yen should boost the value of their repatriated profits and make their exports cheaper.
On the flip side, consumers in Japan may face more struggles with cost of living. This is one reason that Japanese Prime Minister Fumio Kishida has emphasized the need for wage growth and policies to address pay inequality.
He opened his speech at the New York Stock Exchange last year in similar fashion to one delivered five years earlier by his late predecessor, Prime Minister Shinzo Abe, with humor and baseball metaphors. He then called for salary increases to beat inflation. In March, there was progress on this front when the country’s main labor unions won a preliminary agreement for wage hikes of 3.8%—the largest raise since 1993.4
To address an area in which “Abenomics” policy arguably failed, Kishida called for an “essential” new system to draw more individual assets into markets, referring to a “new form of capitalism” for wealth redistribution. To this end, he proposed making the country’s tax-exemption system a permanent program, saying that such incentives are needed because Japanese households have about US$14 billion in personal financial assets but “only around 10%” invested in stocks.5 Turning the dial on that–even a little–could make a big difference for Japanese equities. We believe investors looking for exposure may find Japan-focused passive exchange-traded vehicles as a compelling means to gain a low-cost diversification to Japanese stocks.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
Commissions, management fees, brokerage fees and expenses may be associated with investments in ETFs. Please read the prospectus and ETF facts before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
1. Source: Japan National Tourism Organization 2023
2. Source: FTSE, as of April 27, 2023. The FTSE Japan Capped Index is based on the FTSE Japan Index and is designed to measure the performance of Japanese large- and mid-capitalization stocks. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results. See www.franklintempletondatasources.com for additional data provider information.
4. Source: Bloomberg, March 16, 2023.
5. Source: Kizuna, “PM Kishida’s Speech on the New Form of Capitalism and Why Japan Is a “Buy,” June 23, 2022.