Buybacks are rising in Japan, where stocks are modestly priced.
Photo: behrouz mehri/Agence France-Presse/Getty ImagesCorporate Japan has a reputation for penny-pinching and hoarding cash. But recently they are learning to love spending on their shareholders.
Buybacks have surged, rising 48% in this fiscal year, according to CLSA strategist Nicholas Smith, as multiyear corporate-governance reforms bear fruit. That’s just one of many reasons for investors to seriously consider an allocation to Japan’s stock market.
Heftier payouts to shareholders are particularly welcome given the mountain of cash Japan Inc. is perched atop. Nonfinancial firms have around 285 trillion yen ($2.596 trillion) in currency and deposits, up over ¥100 trillion in the last decade. It’s high time they put it to work.
A greater focus on corporate governance and stewardship during the tenure of Prime Minister Shinzo Abe has led Japanese firms to unwind a tangled web of cross-shareholdings and place more emphasis on boosting returns for shareholders.
With a total return of around 110% in dollar terms over the past 10 years, Japan trails only the U.S. in performance among large, developed stock markets.
But unlike the U.S., where an explosive bull market has left stocks looking expensive, Japan’s are modestly priced. Compared with expected earnings in the next 12 months, U.S. stocks are at their most expensive levels since 2002, with a price-to-earnings ratio north of 19. The same PE ratio of Japan’s listed stocks is around 15, just slightly above the 10-year average of 14.
According to Japan’s balance of payments data, overseas investment in the stock market has already declined significantly. Between the beginning of 2012 and the middle of 2015, overseas buyers snapped up ¥25 trillion of Japanese equities. Since then, they have sold around ¥16 trillion worth. That suggests asset managers have plenty of headroom to increase their allocations to the country if they want.
Low foreign ownership, relatively cheap valuations, and an increasingly shareholder-friendly policy—these things already make Japan attractive. If the country experiences more robust growth, or its corporations really start to put their colossal cash piles to work, its stocks will become a screaming buy.
Any equity investor with a long time horizon would do well to consider a significant allocation to Japan.
Write to Mike Bird at Mike.Bird@wsj.com
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