Big in Japan

Japan’s equity market has posted consecutive annual gains of over 20% in 2023 and 2024 in local currency terms. Year to date, the TOPIX has outperformed the S&P 500 by approximately 8% in dollar terms, supported by a 7.6% appreciation in the yen. For investors newly seeking international diversification, is it too late to buy into the Japanese upswing? Let’s take a look. 

Japanese equities’ strong performance stems from improving fundamentals. Corporate reforms initiated by the Tokyo Stock Exchange are gaining traction, with more companies enhancing governance practices, increasing dividend payouts, and executing share buybacks. In a further boost to market openness, the Japanese government revised its corporate takeover guidelines in August 2023, making domestic firms more accessible to international investors. 

These developments are occurring alongside rising wages and prices, fueling optimism for a virtuous cycle of increased corporate investment, productivity gains, higher incomes, and stronger consumer spending. 

From a valuation standpoint, Japanese equities remain attractive. The TOPIX trades at a forward P/E of 14.7x and an EV/EBITDA of 4.4x - significantly below the S&P 500’s 22.5x and 15.4x, respectively. 

This combination of structural reform, compelling valuations, and growing global interest continues to position Japan as a promising destination for international diversification and potential equity outperformance, even after its recent strong returns. 

Maverick Lin contributed to this article. Market and valuation data from Bloomberg.