have come flooding back to Japan since it reopened to travel in late 2022, making up for three years’ absence during the covid-19 pandemic. The weakness of the yen has produced some bargains for these recent arrivals. For the first time in a much longer period, investors are similarly excited about the bargains to be found in Japanese stockmarkets.
From January to August foreigners bought ¥6.1trn-worth of Japanese stocks, which represents the largest nominal inflow during the same timeframe since 2013. According to a survey by Bank of America, more fund managers are now overweight the country’s shares than at any time in almost five years. The return of investors to Japan’s markets has been driven by optimism about reforms to corporate governance, with companies increasingly subject to investor activism and therefore returning cash.
All this optimism will soon be put to the test. After all, it is not just prospects for corporate-governance reform that have fuelled the rise in Japanese stocks; it is also the astoundingly cheap yen, and that may not last. The currency trades at ¥149 to the dollar, its weakest in three decades—down by 23% since the end of 2021. Japanese exporters, which face domestic costs but make much of their revenue overseas, have benefited enormously from this state of affairs.
The yen’s weakness has been caused by huge differences in interest rates, with capital flows moving to higher-yielding assets. Unlike almost every other central bank, the Bank of Japan has refused to raise rates: its short-term interest rate remains at -0.1%. Yet observers increasingly expect theto shift, abandoning its cap on ten-year government-bond yields and raising rates for the first time since 2007. Japan’s “core core” inflation, which strips out fresh food and energy prices, sits at 4.
Reforms to Japanese corporate governance are not to be sniffed at, and some beaten-down companies still present opportunities. Yet these bright spots will not be enough to overwhelm the macroeconomic gloom that is now enveloping Japan. Global investors sometimes seem capable of holding only one narrative in mind when it comes to the country: Japan is either a stagnant mess, with little hope of rescue, or is on the verge of an epoch-defining revival. This dichotomy does not apply today.