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Japan: Will reforms further unlock stock valuations?
Eu-Gene Cheah
Equity Portfolio Manager
Akira Horiguchi
Equity Portfolio Manager
Dickon Corrado
Equity Portfolio Manager
Emily Liao
Equity Investment Director

A significant shift is underway in Japan, and equity markets are taking notice. It may not have been obvious to US dollar-based investors, but in local currency terms, Japanese equities as measured by the MSCI Japan Index have climbed 25% year to date (as at 31 August 2023).

The wave of optimism has been driven by two key factors: inflation and reforms. While inflation has been challenging for many developed economies, it’s a welcome sign in Japan, which has been battling deflation for three decades. Sustained and healthy inflation could change the mindset in Japan from saving to investing.

In terms of reforms, there is tremendous emphasis on improving corporate governance, and companies are focusing more on shareholder returns. In a recent move, the Tokyo Stock Exchange asked all listed companies to enact policies to improve profitability, long-term returns and valuations. About 39% of companies in the TOPIX (an index comprising Japanese stocks) trade below book value, compared to just 5% for companies in the S&P 500 Index. 

Book values are depressed in Japan

Percentage of index constituents whose price-to-book ratios are:

Book values are depressed in Japan

As at 18 August 2023. The price-to-book ratio is the ratio of a company's publicly traded share price to its equity value per share. Sources: Capital Group, FactSet, Refinitiv Datastream, Standard & Poor’s, STOXX, TOPIX

Eu-Gene Cheah is an equity portfolio manager at Capital Group. He has 25 years of investment industry experience, all with Capital Group. He holds an MBA with distinction from INSEAD, France, and a degree in clinical medicine from Oxford University, where he was a Rhodes Scholar. Eu-Gene is based in Singapore.

Akira Horiguchi is an equity portfolio manager at Capital Group. Akira has 29 years of investment industry experience and has been with Capital Group for 22 years. He holds a bachelor’s degree in economics from Tokyo University. He is also a chartered member of the Security Analysts Association of Japan. Akira is based in Tokyo.

Dickon C. Corrado is an equity portfolio manager at Capital Group. He has 23 years of investment experience and has been with Capital Group for 20 years. He holds an MBA from the Kenan-Flagler Business School at the University of North Carolina, a master’s degree in international economics from Fudan University in Shanghai, and a bachelor’s degree in economics and engineering science from Vanderbilt University. Dickon is based in Tokyo.

Emily Liao is an equity investment director at Capital Group. She has 19 years of investment industry experience and has been with Capital Group for 10 years. She holds a bachelor's degree in sociology from the University of Chicago. Emily is based in New York.

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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.