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Japan: Will reforms further unlock stock valuations?
Eu-Gene Cheah
Akira Horiguchi
Dickon Corrado
Emily Liao
September 8, 2023
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:
.png "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
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Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.
Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
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.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.