We sometimes turn our attention from traditionally productive domestic stock markets to foreign stock exchanges that have suddenly caught fire.
Often that stock market is located anywhere in the world. emerging market – China, India, Brazil or other parts of the world enjoy an economic boom economic growth It is known in developing countries.
But the searingly hot market that has recently captured the imagination of American investors is none other than…Japan?
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that's right. The island nation, which is still recovering from the economic stagnation of its “lost two decades,” has seen its stock market soar.
And if you've piqued your curiosity about investing in the country's stocks, keep reading. Here's what you need to know about the resurgent Japanese stock market and what to consider when looking for the best Japanese stocks.
Why should you invest in the best Japanese stocks?
For those unfamiliar, Japan has spent much of the past 35 years stuck in a long economic rut known as the “lost two decades.” What started as both an economic and market bubble burst in the late 1980s, turning into more than three decades of largely unchecked economic stagnation and some of the deepest debts on the planet.
Japan's economy has finally begun to turn a corner in recent years, and this is the driving force behind the rise. Japanese stocks – recently. But those new to the country's stocks should know that the main index, the Nikkei 225, is falling. rapid turnaround Over 10 years.
Prime Minister Shinzo Abe's election at the end of 2012 and the subsequentAbenomics” The plan sent a shockwave through stocks, even if the economic impact was limited. The Nikkei Stock Average has risen more than 280% since then and actually outperformed the S&P 500 Index by about 25 percentage points.
If investors weren't paying attention before, they are now. The Nikkei Stock Average has risen about 40% over the past year, while the S&P 500 Index has risen 27%. In late February, the Nikkei Stock Average reached a historic milestone, surpassing its all-time high of 38,915.87, a record held for 34 years. Since then, the number has exceeded 40,000.
What's driving your excitement these days?
For example, Goldman Sachs analysts call the Tokyo Stock Exchange's recent corporate governance reforms a “game changer.”
“Stock exchanges incentivize listed companies to increase their valuations and profits, and companies that cannot demonstrate that they are using capital efficiently may be delisted,” Goldman says. “Investors view the dissolution of cross-shareholdings (shares held by companies to maintain relationships with business partners) in Japanese companies as a sign of improved governance.''
Corporate earnings have improved and are expected to improve next year. This has been helped somewhat by the weaker yen, which also helps with the value proposition of Japanese stocks to overseas investors.
Nikko Asset Management also notes that Japan's “decades of implicit spending on software is a proxy for the types of spending that companies typically make in good faith efforts to increase the productivity of their operations.” I think there are reasons for optimism.
Meanwhile, the economy, while not exactly vibrant, has shown some dynamism over the past few years amid a combination of aggressive fiscal and monetary policies and the lifting of COVID-19 restrictions.
Another factor that increases interest in Japanese stocks is Recent media attention It surrounds the interests that Warren Buffett's Berkshire Hathaway (BRK.B) has built up in several Japanese companies.in him Annual letter to shareholdersBuffett said Berkshire's unrealized dollar gains on these investments at the end of 2023 were $8 billion.
How to find the best Japanese stocks
Choosing the best Japanese stocks is almost the same as picking Japanese stocks. best stocks to buy Here at home. Japan's stock market is highly regulated, and listed companies are required to submit quarterly and annual financial reports. Therefore, there is a wealth of information available about almost any company you are interested in.
Just like we evaluate US stocks, we evaluate Japanese stocks based on valuation. growth potentialbalance sheet health, cash flow generation, etc.
In fact, when it comes to investing in Japanese stocks, there's only one meaningful difference…but it's a very important one that limits your options.
The difference is access.
A U.S. exchange or retirement account typically allows you to invest in stocks and funds on all major U.S. exchanges (as well as over-the-counter). However, access to foreign stock exchanges is rarely provided. It is very unlikely that you can buy a few shares just by entering the ticker of the Tokyo Stock Exchange.
This means it is limited to Japanese companies that trade as American Depositary Receipts (ADRs) on major stock exchanges or over the counter.
ADRs are certificates issued by U.S. banks that represent foreign stocks but are traded like regular U.S. stocks. Listing on the New York Stock Exchange or Nasdaq conveys a higher level of accounting and transparency than required in your home market, as ADRs must comply with the requirements of the exchange on which they are listed.
Of course, the Tokyo Stock Exchange has strict rules. Therefore, while over-the-counter stocks are usually considered risky, Japanese stocks that trade on Japan's TSE but over-the-counter in the United States are very safe. Consider some of the big and very well-known names: Nintendo (NTDOY), nissan (NSANY) and Shiseido (SSDOY) All transactions over-the-counter. (Be careful to trade in sufficient quantities; his three examples above are liquid enough.)
Also, if you're trading as an ADR, whether it's traded on the NYSE, Nasdaq, or OTC, your investor materials are usually in English, and you may still want to brush up on your hiragana, katakana, and kanji. Useful for those who don't.
If you simply don't have the time to research individual stocks or want to diversify your Japanese holdings, you can always consider broad-based Japanese exchange traded funds (ETF). Among the most popular are: iShares MSCI Japan ETF (EWJ), currency hedged WisdomTree Japan Hedge Equity Fund (DXJ) and Franklin FTSE Japan ETF (FLJP).
