- While the direct impact of Japan’s new Reiwa imperial era on markets and the economy should be minimal, the psychological significance is important.
- The structural market reform in Japan in recent years is being reflected in record company profits, higher investor returns, and increasing foreign investment inflows.
- During the second half of 2019, Japanese equities should continue to be supported by robust company fundamentals, a stable economy, and modest global growth.
Start of a new era
On May 1, 2019, the new Reiwa imperial era commenced in Japan, as emperor Naruhito officially acceded to the throne. While the direct impact of this on the economy, markets, or politics should be minimal, the psychological significance—Reiwa translates to “beautiful harmony”—is important. It represents a symbolic clean slate for Japan, drawing a line under the beleaguered 30‑year Heisei era. Given the positive economic and market changes already underway, Japan now has the potential to redefine itself and its role in the world.
Against this backdrop of change, an increasing number of Japanese companies are defying sceptics by transforming business practices and governance standards. We believe this can help corporate profit growth and generate improving shareholder returns. The volume of shareholder buybacks is increasing while merger and acquisition activity also shows promise.
Japanese companies converging with global peers
From an investment perspective, the equity market is now supported by strong growth in company profits. Indeed, aggregate corporate profits have been exceptional over the past decade, with Japan breaking away from its history of lower returns to converge with the profitability levels of global market peers. The quality of Japanese companies, both in terms of governance standards, and returns for investors, has continued to rapidly improve, closing the gap with Europe and U.S. equity markets.
Over the past five years, for example, the return on equity from Japanese companies has almost doubled. Companies are allocating capital more efficiently, paying higher dividends, and increasing share buybacks, and these improved returns are attracting greater foreign investment.