Does Japan’s stock market rally have legs?

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Ethan Wu (0:36)

Thank Pushkin.

30 years ago, the Japanese stock market collapsed, and it's always been about to come back, but never really has, but this year, this year listeners, it came back. It's been the best performing developed market this year. It's up more than 20%, and it's attracting attention from investors all over the world, notably one Warren Buffett of Berkshire Hathaway, who traveled to Tokyo in April to invest in a couple of Japanese trading houses. So there's excitement, and today on the show we're talking three reasons why we buy this Japan rally, and maybe a couple of reasons for doubt.

This is Unhedged, the new markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined as ever on Tuesdays by FT Markets editor Katie Martin. Katie, hello.

Katie Martin (1:23)

Hey Ethan, how are you going?

Ethan Wu (1:25)

Hey, hey, I'm pretty well.

Katie, I will admit, you know, a listener wrote in and said, you know, on our episode last Tuesday, that we should call like the, you know, the big seven stocks of the US stock market, seven up, because there are seven stocks and they're going up, which I appreciated that email. But I am sick of talking about those stocks. I'm sick of Nvidia. I want to talk Japan.

Katie Martin (1:43)

How do you feel? Have you had too much fizzy pop? Is it making you feel poorly?

Ethan Wu (1:48)

Fizzy pop is bad for your digestion, or at least mine. Maybe I have a weak stomach. But Katie, there are three reasons that we buy this Japan rally.

Katie Martin (1:57)

Yeah.

Ethan Wu (1:57)

And they are the global context of the rally, the fact that inflation is back in Japan, and a wonkier change, but one that I think is no less important, corporate governance reform in the country. Let's start with the global context. I think this one is both the most intuitive and maybe the most important.

Japan's growing a lot. It grew 2.7% in the first quarter of this year. You just can't find economic growth rates like that anywhere in major stock markets, can you?

Katie Martin (2:22)

So yeah, Japan definitely benefits from being not the US not Europe and not China.

So it sounds kind of ridiculous, but it sort of works, right? So one investor I was speaking to recently was saying, look, I'm done with the US. You know, these seven up stocks, the kind of seven fizzy tech AI related stocks that have been propping up the stock market this year in the US.

I just don't like the look of it. It makes me a bit nervous. And in any case, valuations are like really high over in the States. So where else do you look, right? You look at Europe and you think, oh, I don't know, bit of a recession potentially coming here. And also Europe has had a good year so far this year in stocks.

And then you look at Asia and, you know, typically that would mean, okay, fine, let's take on some China risk. But the Chinese economic recovery from the COVID lockdowns has been really quite a severe disappointment. You look at the geopolitics and you think, not keen on that either. You look at the constant risk of some sort of regulatory crackdown that comes from China and investors are just not that into it at the moment. So they're looking elsewhere in Asia for some good opportunities and Japan is right up there.

Ethan Wu (3:32)

And you can see evidence of that in what type of capital has been flowing into Japan. There's some domestic Japanese investors, but really Katie, it's been global investors that have been powering this rally.

And, you know, I talked to a portfolio manager who works on Japanese stocks recently, this guy, Nick Schmitz, at Verdad. And, you know, he makes the point that, you can see, capital has flown where Western investors have the most easy mutual fund and ETF access to the Japanese market. They're just grabbing what's available on the shelf and buying those stocks. And, you know, I think that fits into this picture where if you're a global investor and you're looking at the options you've got, I mean, Japan looks pretty good right now, all things considered.