The Tokyo stock market is roaring after more than three decades of silence. Over the past few weeks, Warren Buffett has been adding to his holdings in Japanese retail companies as the cash tide has poured in
The Japan fund has risen to new highs.
The excitement makes sense. Companies in Japan, known for hoarding cash to protect themselves against tough times, appear to have changed their cautious stance and are returning cash to shareholders.
According to Dow Jones, the 225 companies that make up the Nikkei Stock Average paid an unprecedented 21.28 billion yen ($149 million) in dividends for the fiscal year ended March, while share buybacks for the same period climbed to a record 8 Trillion yen rose market data. The fill levels are pint-sized by comparison the US, where S&P 500 companies paid $557.83 billion in dividends and engaged in share buybacks totaling $933.15 billion in 2022, but growing significantly over the past two years. Dividends are up 51% since 2021, while buybacks have more than doubled.
And investors have reason to hope that trend will continue.
(7267:JP) decided to pay a record ¥150 per share for the year ended March 2024. Citizen Watch (7762:JP) announced earlier this year that it would buy back nearly 26% of its shares by mid-February, implying a ¥65.59 billion buyback program, albeit the largest ever in a Japanese fiscal year
Mitsubishi UFJ Financial Group
(8306:JP), Japan's largest lender, has suspended buybacks citing uncertainty over global bankruptcies.
Buybacks and dividends usually drive stock prices higher — Honda Motor stock is up 45% in the first half of this year, while Citizen is up 46% — but the folks who run Japan's main stock exchange want more. Almost 45% of companies in the Nikkei Stock Average trade for less than the value of the assets on their books, compared to 5.2% of companies in the S&P 500, leaving the Tokyo Stock Exchange urging change.
She wants companies to increase their price-to-book ratios above one. While ratios below this level equate to cheap stocks, they also suggest that investors lack confidence in growth and profitability prospects. The TSE proposes investing in “research and development and human capital” to improve the ratio. Buying back shares and returning capital through dividends could also help.
The exchange hasn't set a deadline for compliance, but the specificity of the target combined with the recent pace of change is causing investors to be excited. Add to that a flurry of spending from travelers after Japan, one of the last Covid-19 holdouts, opened its doors in October, and companies are offering workers higher wages as prices plummet in a long-torn deflationary economy rise and you will witness a rally in one of the largest stock markets in the world.
The Nikkei is up 27% year-to-date compared to 16% for the
While it's still about 15% below the record 38,916 set in December 1989, the market appears to be recovering. The index crossed the 33,000 mark this year for the first time in 33 years.
“One could argue that there is upside potential [and] for higher valuations in the future,” said Joe Nelesen, senior director for index investment strategy at S&P Dow Jones Indices.
Funds have potential gains for investors who lack the time or expertise to track individual Japanese stocks. Using Morningstar Direct, Barrons attempted to weed out the 25 US-based Japan fund Options, selecting individuals with assets of at least $200 million, low expense ratios and at least a five-year track record. Five that looked attractive were both mutual funds and exchange-traded funds active and passive investment strategies.
The iShares MSCI Japan ETF (ticker:
) is Japan's largest equity fund with assets of $13 billion, adding $1.6 billion so far in June, the largest monthly net inflow since October 2018. The passive fund, which tracks the MSCI Japan benchmark index, focuses on large-cap stocks. Industrial and technology companies such as
(TYO: 6501) and
(TYO: 6758) make up more than 40% of the ETF.
BlackRock (BLK), the market leader in the ETF industry, offers the iShares MSCI Fund with an expense ratio of 0.5%, which is relatively low for Japan category, although cheaper alternatives are available.
Net of fees, the fund is down 18% over the past year but has returned 2.8% annually over five years and 4.9% over a 10-year period Period. Returns would have been better had it not been for the swings in the dollar-yen exchange rate. Calculated on an annual basis over five years Gain on iShares Currency Hedged MSCI Japan ETF (
) is 10%, about three times better than for the unhedged fund.
Investors might prefer the $2.5 billion
Japan Hedged Equity Fund (
), which is up 12% annually over five years and 10% annually over 10 years. The fund has more of a focus on companies that give cash to investors than its peers, with a dividend yield of 5.1%, compared to about 3% for the iShares ETFs, which is in line with the average for the broader category.
“The big dog in this space is actually WisdomTree's DXJ,” says Dave Nadig, ETF expert at VettaFi, a data and analytics provider for the industry. “In most performance periods, it wins without a doubt.” The fee is 0.48%, in line with the price of iShares ETFs.
The cheapest fund on screen was the $1.3 billion fund
Franklin FTSE Japan ETF
), which launched in 2017 and has an expense ratio of 0.09%. The fund holds large and mid-cap Japanese stocks and has returned 3% annually over five years.
At the other extreme is the actively managed Matthews Japan Fund (
), which costs investors 1.05% of their investment every year. It offers investors diversified exposure to the markets with an 8% weighting in small-cap companies and 20% in mid-cap companies (as of end-March). The fund is up 0.8% on an annual basis and 6.1% over the past five years. over 10 years, likely helped by the small-cap category, which according to Morningstar was one of the top-performing Japanese market segments over the 10 years to February.
Japanese small caps are less liquid, more volatile and also more sensitive to the economic outlook, allowing them to take advantage of improving conditions. Dimensional Fund Advisors' $259 million DFA Japanese Small Company I (DFJSX) focuses on these companies.
The fund, launched in 1986, is the oldest in the group and has a fee ratio of 0.4%. On an annual basis, it's down 1.2% per year over five years, but has produced a 5.6% annual return over 10 years for risk-aware investors.
Write to Karishma Vanjani at [email protected]