The Tokyo stock market is roaring after more than three decades of silence. In recent weeks, Warren Buffett has beefed up his holdings of Japanese trading companies while the tide of cash pouring into
BlackRock’s
Japan fund has risen to fresh highs.
The enthusiasm makes sense. Businesses in Japan known for hoarding money as a safeguard against hard times seem to have shifted their cautious stance and are handing cash back to shareholders.
An unprecedented ¥21.28 billion ($149 million) in dividends was returned by the 225 companies in the Nikkei Stock Average in the fiscal year that ended in March, while share buybacks ballooned to a record ¥8 trillion over the same period, according to Dow Jones Market Data. The levels are pint-size compared with the U.S., where S&P 500 companies paid out $557.83 billion in dividends and made share buybacks totaling $933.15 billion in 2022, but they have grown significantly in the past two years. Dividends have grown 51% since 2021 while buybacks have more than doubled.
And investors have reason to hope the trend will continue.
Honda Motor
(7267: JP) has decided to pay a record ¥150 a share in the year ending March 2024. Citizen Watch (7762: JP) earlier this year said it would buy back nearly 26% of its shares by mid February, implying a buyback program worth ¥65.59 billion, the largest ever for a Japanese fiscal year, though
Mitsubishi UFJ Financial Group
(8306: JP), Japan’s largest lender, has paused repurchases citing uncertainty about bankruptcies worldwide.
Buybacks and dividends typically boost share prices—Honda Motor stock was up 45% in the first half of this year, while Citizen gained 46%—but the people who run Japan’s main stock market are asking for more. Nearly 45% of the companies in the Nikkei Stock Average trade for less than the value of the assets on their books, compared with 5.2% of those in the S&P 500, so the Tokyo Stock Exchange is pressing for change.
It wants companies to boost their price-to-book ratios above one. While ratios below that level are synonymous with stocks that are cheap, they also imply that investors lack confidence about the outlook for growth and profitability. The TSE suggests investing in “research and development and human capital” as one way to improve the ratio. Buying back stock and returning capital through dividends could help as well.
The stock exchange hasn’t set a deadline for compliance, but the specificity of the target, combined with the recent pace of change, has investors excited. Add in a dash of spending from travelers after Japan, one of the last Covid-19 holdouts, opened its doors in October, plus the fact that companies are offering higher wages to workers as prices grow in an economy long plagued by deflation, and you have a rally in one of the world’s largest stock markets.
The Nikkei has gained 27% since the start of the year, compared with 16% for the
S&P 500.
While it is still about 15% below the record of 38,916 achieved in December 1989, the market appears to be coming back. The index crossed the 33,000 mark this year for the first time in 33 years.
“One could make the argument that there is upside to earnings [and] for higher valuations moving forward,” says Joe Nelesen, senior director for index investment strategy at S&P Dow Jones Indices.
Investors who lack the time or expertise to track individual Japanese stocks can take advantage of potential gains using funds. With the help of Morningstar Direct, Barron’s took a stab at weeding through the 25 U.S-based Japan fund options, screening for those with at least $200 million in assets, low expense ratios and no less than a five-year record. Five that looked appealing include both mutual funds and exchange-traded funds, as well as active and passive investing strategies.
The iShares MSCI Japan ETF (ticker:
EWJ
) is the largest Japan equities fund at $13 billion in assets, with $1.6 billion added in June so far, the biggest monthly net inflow since October 2018. The passive fund, which tracks the benchmark MSCI Japan index, is concentrated in large-cap stocks. Industrial and technology companies such as
Hitachi
(TYO: 6501) and
Sony Group
(TYO: 6758) comprise more than 40% of the ETF.
BlackRock (BLK), the leader in the ETF industry, offers the iShares MSCI fund, at a 0.5% expense ratio, which is relatively low for the Japan category, although cheaper alternatives are available.
The fund, after fees, was down 18% last year but has earned 2.8% annualized over five years and 4.9% annualized over a 10-year period. Returns would have been better if not for moves in the dollar-yen exchange rate.The five-year annualized gain of the iShares Currency Hedged MSCI Japan ETF (
HEWJ
) is 10%, some three times better than for the unhedged fund.
Investors may prefer the $2.5 billion
WisdomTree
Japan Hedged Equity Fund (
DXJ
), which has gained 12% a year on a five-year annualized basis and 10% over 10 years. The fund is tilted more toward companies that pay out cash to investors than its rivals, with a dividend yield of 5.1%, compared with about 3% for the iShares ETFs, which is the average for the broader category.
“The big dog in this space is actually WisdomTree’s DXJ,” says Dave Nadig, an ETF expert at VettaFi, a data and analytics provider for the industry. “It wins hands down in most performance periods.” The fee is 0.48%, in line with what the iShares ETFs charge.
The cheapest fund in the screen was the $1.3 billion
Franklin FTSE Japan ETF
(
FLJP
), which was launched in 2017 and has an expense ratio of 0.09%. The fund holds Japanese large-and mid-cap stocks and has returned an annualized 3% a year over five years.
On the other end is the actively managed Matthews Japan Fund (
MJFOX
), which costs investors 1.05% of their investment each year. It offers investors diversified exposure to the markets, with an 8% weighting in small-cap companies and 20% in mid-cap firms as of the end of March.The fund is up an 0.8% annualized over the past five years and 6.1% over 10 years, likely supported by the small-cap category, which was one of the best-performing Japanese market segments over the 10 years through February, according to Morningstar.
Japanese small-caps are less liquid, more volatile, and are also more sensitive to the economic outlook, which allows them to benefit when conditions improve. Dimensional Fund Advisors’ $259 million DFA Japanese Small Company I (DFJSX) focuses on those companies.
Launched in 1986, making it the oldest among the group, the fund comes with a 0.4% fee ratio. It is down 1.2% a year on a five-year annualized basis, but has returned an annualized 5.6% over 10 years for investors with the stomach for its risks.
Write to Karishma Vanjani at [email protected]
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