Japan is increasingly the place to be for U.S. and other Western institutional investors, both as a place to invest and to raise capital, according to an analysis by research firm Preqin.
“Japan’s back in fashion among international investors after several years out in the cold, with the Nikkei 225 pushing through the 40,000 mark for the first time” in March, the report stated. It fell below that level over the past couple of weeks but is still close.
This marks a turnaround for Japan, which had been plagued by slow growth and a reputation as difficult to access for many years. But corporate governance improvements and rising equity values have made the world’s third largest economy more enticing to outsiders.
Indeed, over the past 12 months as of last week, the benchmark Nikkei 225 Index increased 33.8%, ahead of the S&P 500’s 24.2%. In terms of affordability, the two indexes are close: The primary U.S. equity index has a forward price/earnings multiple of 20.1 and the Nikkei’s is 21.3. A major plus for U.S. investors in Japan is the dollar’s growing strength versus the Japanese yen, up 18.3% from 12 months ago, meaning U.S. money buys more Japanese assets than before.
The Preqin report, written by Angela Lai, head of the Asia Pacific region in Preqin’s Research Insights team, detailed how Japan is increasingly open to outside investments. Foreign direct investments into Japanese stocks and futures totaled $43.4 billion last year, after several years of outflows.
Also helping: There are more places to invest in Japan. For one thing, private equity is increasingly in vogue. PE has recorded strong growth in recent years, with assets under management hitting a record $46.3 billion as of year-end 2022, almost triple the amount from 10 years before. Plus, internal rate of return in a Preqin survey was 22% averaged annually from 2012 to 2021, far outpacing the TOPIX index return of 9.2% during the period.
Moreover, the Japanese financial establishment is increasingly eager to allocate capital to foreign managers, the report noted. The biggest such provider is Japan’s pension system ($3.3 trillion in assets), GPIF, which dominates the nation’s investment landscape. Indeed, the Government Pension Investment Fund (224 trillion yen, $1.42 trillion) is the world’s biggest public pension program.
Other large players are asset managers Mitsubishi UFJ Trust and Banking Corp. ($365 billion), Asset Management One ($296 billion), and Nissay Asset Management ($255 billion).
Gaining access to them in more and more the province of private wealth allocators, who direct investments to the big boys and sometimes package capital from several different investors.
“It’s good news for [non-Japanese] fund managers that traditionally conservative institutions have been supplemented by a growing number of private wealth allocators,” Lai observed.
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Tags: Angela Lai, dollar, foreign direct investment, GPIC, Japan, Nikkei 225, Private Equity, S&P 500, TOPIX