Asia & Australasia | Inward Investment

Japanese Prime Minister Shinzō Abe, whose ‘Abenomics’ financial plan appears to be bearing fruit

As the Japanese economy starts to recover, foreign investors are taking the lead on equities and real estate as long-term investments

While still relatively unloved and under-owned, Japan’s economy is looking to pick up in the coming years and catch up on the global earnings recovery. Investor capital has continued to pour into the Japanese hedge fund industry over the past few months as foreign investors show increasing interest for Japanese equities. The potential for earnings per share growth is looking greater than ever, according to BNY Mellon’s Japanese equity investment team.

Giving a broad overview of the Japanese economy, Miyuki Kashima, Head of Japanese Equity Investments at BNY Mellon Asset Management Japan, explained that she has “never felt this positive for the long term” during her near 30-year career running Japanese equities. She argued that even given last year’s equity rally, which saw Tokyo’s TOPIX index gain more than 50 percent in local currency terms, the market was a long way off its peak. “The market hasn’t caught up to the earnings recovery since the financial crisis,” Kashima said, adding that she expects a 10 percent growth in earnings in the coming financial year.

As such, BNY Mellon, like many other international firms, has recently launched two new funds investing in Japanese small- and all-cap equities. This comes at a time when global funds have put more than $150bn into Japanese investments – despite still being massively underweight on the asset class. However, as 2013 data from EFPR Nomura reveals, investors have been underweight since 2008, but in the past year sentiment has grown gradually positive and pushed inflows into record territory.

Bullish on Japanese equities

The positive sentiments on Japan are also shared by other industry players such as Swiss & Global Asset Management, which is part of Switzerland-listed GAM Holding AG. The firm said in a recent outlook on Japanese equities that it expects double-digit annual profit growth for the asset class in 2014 and 15.

“Sustained currency weakness will continue to benefit most Japanese companies; a weaker yen will allow businesses to achieve an even higher level of profitability and will boost investment spending and wages. This will herald an end to deflation and boost the country’s economic growth,” the firm said in the paper .

North American FDI into Japan (net)