Despite the recent strong returns, Jeremy Osborne, head of Japan equity investment directing at , thinks Japanese equities still offer compelling value and investors are underexposed to the market.

The performance of Japanese equities since last year has been supported by several factors. Chief among them are the country’s shift towards moderate inflation, corporate governance reforms enacted by the Tokyo Stock Exchange (TSE), the Bank of Japan’s accommodative policy stance and accompanying weakness in the yen, and renewed buying among overseas investors. There is also a sense that investors are favouring Japan for its relative stability compared with other markets, which has contributed to the direction of flows, he said in a note.

Osborne thinks Japanese stocks are not excessively priced, and both overseas and domestic investors remain underinvested in Japanese stocks.

He is not alone in his views. “Fifteen years of restructuring has improved corporate cashflow and margins resulting in higher shareholder returns. The process has further to run, and valuations are still cheap,” Rupert Kimber, portfolio manager at the Geneva-based asset management company , an IFA, said a key driver of Japan’s stock market resurgence lies in the robust corporate earnings reported by major companies. 

“Banking, electronics, and consumer stocks, in particular, have displayed stellar financial performances, instilling confidence in investors. The corporate sector’s ability to weather economic challenges and deliver strong earnings signals resilience and adaptability,” Green said in a note. “Regulatory reforms aimed at streamlining procedures, reducing bureaucracy, and enhancing transparency are also instilling confidence in foreign investors."

“The combination of robust corporate earnings, investor-friendly measures, a weaker yen, and a commitment to improved corporate governance creates a compelling narrative for those considering investments in Japan,” Green said. “It seems that 2024 is set to be the year that global investors, recognising the unique and lucrative prospects offered by its resurgent stock market, rediscover and pile back into Japanese equities.”