Our investment professionals share and challenge each other’s views, creating a diverse marketplace of ideas for the Wellington Blog.
Over the past decade or so, there have been countless studies and articles on the inability of active portfolio management to reliably add value versus market benchmarks, even before accounting for fees. However, most of the research tends to focus on US markets, particularly US large-cap equities, and glosses over (or ignores altogether) the reality that there are other market categories where active managers have, in fact, had a great deal of success historically (and may continue to do so). The inefficient Japanese equity market is a prime example.
The proof is in the pudding, as shown in Figure 1: During 70% of rolling three-year time periods over the past 20 years (ended 31 December 2020), at least 60% of active Japan equity managers — in some years, substantially more than that — have outperformed their respective benchmarks. By contrast, and as expected, most US large-cap equity managers have struggled to consistently top their benchmarks, with 60% or more…
Most people who visit Japan for the first time come back raving about just how “clean” it is compared to other countries – which, in my view, makes it somewhat ironic that Japan has never really been considered a fertile hunting ground for investors looking for “clean” (environmentally-friendly) companies. But that doesn’t mean that such companies don’t exist here. On the contrary, we have found (and continue to find) great numbers of them; it simply takes some time and effort to identify and properly understand them.
A multitude of factors go into that search and vetting process, but as an investment team focused primarily on smaller companies operating in niche markets internationally, we see Japan as a land of hidden environmental, social, and governance (ESG) gems.
At both the government and corporate levels, many observers have characterized Japan as a country that is slow to change and adapt to the times. That perception rings true to some degree with regard to ESG, particularly on the…
Japanese stocks have been decidedly out of favor with most investors for several years now, underperforming most recently in response to the 2020 COVID-19 crisis and Japan’s delayed economic recovery from it this year. (For more on that and related equity opportunities in Japan these days, please see Revisiting Japan from a contrarian perspective, co-authored by my colleagues, Jun Oh and Takuma Kamimura.)
Meanwhile, on a more upbeat note, the trend toward Japanese corporate governance reform is steadily proceeding apace. With Japan’s revised Corporate Governance Code calling for further improvements to the functioning of corporate boards of directors, as well as strategies for addressing global climate change, Japanese equity returns to shareholders have in many cases rebounded lately amid stronger business performances. This is an encouraging development that we broadly expect to…
With US stocks notching record highs this year, significantly outperforming their Japanese counterparts, the spread between the two equity markets’ valuations has widened meaningfully in recent months (Figure 1).
Why the performance dispersion? Japan’s relatively slower COVID vaccine rollout and the disappointing lack of economic support provided by the (previously) much-anticipated Summer Olympics have clearly weighed on market sentiment of late, but equity investors’ apathy toward Japan actually dates back several years. One might even say that it has become entrenched.
The good news? The valuation gaps between Japan equity and its global peers have arguably reached…
Japan has experienced deflation for much of the past 30 years (Figure 1). That’s the general consensus, so why my titular question? Because what Japan has not had over the past three decades is the sort of broad wage-service deflation that is most feared by economists. Instead, I would characterise Japan’s deflation as having been mostly idiosyncratic in nature.
Japan’s protracted battle with deflation was largely attributable to specific dynamics, including the country’s botched policy response to its 1980s asset-price bubble, whose collapse in 1991 ushered in Japan’s so-called “lost decade” — a period of economic stagnation that lasted until 2001. In addition, I believe the massive…
In late May, Japanese Prime Minister Shinzō Abe’s cabinet approved a second 2020 supplementary budget of ¥31.9 trillion (US$298 billion) to further combat the bruising economic impact of the COVID-19 crisis. This latest fiscal package provides financing help to struggling companies, subsidies to help firms pay rent, funds for health care assistance and support for local economies.
The headline ”business size” of the package — including assumed private-sector activity, loans from public financial institutions and actual new spending by the government — amounts to ¥117 trillion (US$1.1 trillion), matching the size of Japan’s first package delivered in April. All told, the nation’s fiscal policy response to the crisis thus far totals ¥234 trillion, roughly equal to 40% of its GDP.
The approval of the second package follows a May 22 joint statement issued by Haruhiko Kuroda, governor of the Bank of Japan (BOJ), and Tarō Asō, minister of finance, which read:
“The Government and the Bank are committed to making every effort to facilitate corporate financing and maintain stability in financial markets through the…
Amid mounting global economic concerns, some investors have noted that Japan could be particularly vulnerable. The thinking is that a worsening global economy could put pressure on the yen to appreciate, which in turn could risk a cyclical downturn in Japan. Maybe so, but our view is that a full-blown Japanese recession is unlikely.
Although Japan faces challenges, we believe the country’s structural position is stronger than it has been in a generation. We also believe many investors are undervaluing Japan’s structural recovery story and other positive developments, creating potential opportunities for discerning investors.
The euro area shares many fundamental characteristics with the Japan of the 1990s: lower trend growth since the 2008 recession, a large and persistent current account surplus, low inflation, weak banks, corporates with a large and persistent financial surplus and an anemic demographic outlook. Although this theme isn’t new, markets are currently expressing this “Japanification” malaise in the euro area with depressed bank stocks, record low inflation expectations, tight spreads and low volatility.
We believe that uncertainty about the ability and willingness of European policymakers to deploy the necessary measures requires higher risk premia compared to Japan. The market continues to play the Japanification theme but it feels to us that the outcomes will be very different. While the adjustment trajectory of Japan has been long, stable and orderly, we believe there are three reasons why the euro area is unlikely to follow a similar path:
Japan’s adjustment in the 1990s took place against the backdrop of strong global growth. In the five years after the Japanese recession in the early 1990s, global trade volumes increased significantly. Globalisation accelerated, allowing Japan to make a more orderly and smooth transition. We believe the euro area is unlikely to enjoy this tailwind as globalisation trends reverse and global trade flatlines…
Wellington Management Company LLP (WMC) is an independently owned investment adviser registered with the US Securities and Exchange Commission (SEC). WMC is also registered with the US Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA) and serves as a CTA to certain clients including registered commodity pools and their operators. WMC provides commodity trading advice to all other clients in reliance on exemptions from CTA registration. WMC, along with its affiliates (collectively, Wellington Management), provides investment management and investment advisory services to institutions around the world. Located in Boston, Massachusetts, Wellington Management also has offices in Chicago, Illinois; Radnor, Pennsylvania; San Francisco, California; Beijing; Frankfurt; Hong Kong; London; Luxembourg; Singapore; Sydney; Tokyo; Toronto; and Zurich. ■ This material is prepared for, and authorized for internal use by, designated institutional and professional investors and their consultants or for such other use as may be authorized by Wellington Management. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients.
In Canada, this material is provided by Wellington Management Canada ULC, a British Columbia unlimited liability company registered in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan in the categories of Portfolio Manager and Exempt Market Dealer. ■ In Europe (ex. Austria, Germany and Switzerland), this material is provided by Wellington Management International Limited (WMIL), a firm authorized and regulated by the Financial Conduct Authority (FCA) in the UK. This material is directed only at persons (Relevant Persons) who are classified as eligible counterparties or professional clients under the rules of the FCA. This material must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment service to which this material relates is available only to Relevant Persons and will be engaged in only with Relevant Persons. ■ In Austria and Germany, this material is provided by Wellington Management Europe GmbH, which is authorized and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). This material is directed only at persons (Relevant Persons) who are classified as eligible counterparties or professional clients under the German Securities Trading Act. This material does not constitute investment advice, a solicitation to invest in financial instruments or information recommending or suggesting an investment strategy within the meaning of Section 85 of the German Securities Trading Act (Wertpapierhandelsgesetz). ■ In Hong Kong, this material is provided to you by Wellington Management Hong Kong Limited (WM Hong Kong), a corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), and Type 9 (asset management) regulated activities, on the basis that you are a Professional Investor as defined in the Securities and Futures Ordinance. By accepting this material you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. ■ In Singapore, this material is provided for your use only by Wellington Management Singapore Pte Ltd (WM Singapore) (Registration Number 201415544E). WM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. By accepting this material you represent that you are a non-retail investor and that you will not copy, distribute or otherwise make this material available to any person. ■ In Australia, Wellington Management Australia Pty Ltd (WM Australia) (ABN 19 167 091 090) has authorized the issue of this material for use solely by wholesale clients (as defined in the Corporations Act 2001). By accepting this material, you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Management Company LLP is exempt from the requirement to hold an Australian financial services licence (AFSL) under the Corporations Act 2001 in respect of financial services provided to wholesale clients in Australia, subject to certain conditions. Financial services provided by Wellington Management Company LLP are regulated by the SEC under the laws and regulatory requirements of the United States, which are different from the laws applying in Australia. ■ In Japan, Wellington Management Japan Pte Ltd (WM Japan) (Registration Number 199504987R) has been registered as a Financial Instruments Firm with registered number: Director General of Kanto Local Finance Bureau (Kin-Sho) Number 428. WM Japan is a member of the Japan Investment Advisers Association (JIAA), the Investment Trusts Association, Japan (ITA) and the Type II Financial Instruments Firms Association (T2FIFA). ■ WMIL, WM Hong Kong, WM Japan, and WM Singapore are also registered as investment advisers with the SEC; however, they will comply with the substantive provisions of the US Investment Advisers Act only with respect to their US clients.