Yuichi Murao, chief investment officer at Nomura Asset Management, explains why 2022 is a good time to invest in Japan and presents his outlook for the Japanese market, current investment opportunities and key investment themes.

With many firms undervalued in Japan and the potential to deliver strong returns, Yuichi Murao from Nomura Asset Management highlighted opportunities for investors in Japanese equities at a media briefing this month.

Speaking from their London office, Murao emphasised that many Japanese firms have achieved an ROE of 15 per cent or more and their stock valuations are generally lower and relatively attractive. “High ROE Japanese stocks remain relatively undervalued and have returns comparable to those of US equities,” he stressed.

With ESG being high on the agenda, he also pointed to the corporate governance reforms in Japan and the improving capital efficiency. “Introduction of the Corporate Governance Code in 2015 has helped to improve the functioning and diversity of the boards of directors of Japanese companies,” he said.

He also highlighted how net profit margin and financial leverage explain the difference between firms with an ROE above and those with an ROE below 15 per cent. “We believe these factors can be improved through engagement activities with investee companies and such a correction in valuation will provide opportunities for stock price gains,” he said.

“The goal of our engagement activity is to direct companies towards implementing our preferred management practices,” he added. “We aim to improve corporate value through improving business performance and sustainability. We pay attention to social responsibility, efficient use of capital, sound corporate governance and disclosure and dialogue,” he explained. “We have already seen an improvement in many firms’ performance as a result, and we have enhanced our team working on ESG criteria substantially,” he stressed.

Nomura believes that improving capital allocations, shareholder returns and disclosures in terms of ESG are key factors for the success of Japanese companies in the future, especially as ESG is becoming more important in Europe with the Sustainable Finance Disclosure Regulation. The need to focus on sustainable practices is coming, it’s just that Japan is still in its early stages on this, the firm said. Nomura, which is aiming to be a leader in sustainable investment in the region, believes that it is important to capitalise on this trend early.    

Japanese economy
Looking at the Japanese economy, Murao said that inflation accelerated to 2.5 per cent in April and he believes it could remain at around mid 2 per cent, especially if the yen weakens further or crude oil price increases continue. Given the relatively low rate, he sees no urgent need to increase interest rates. He also believes that any slowing of the US and China’s growth would impact emerging economies exports much harder such as Taiwan, South Korea and Mexico. Japan would nevertheless be adversely affected by any slowing of the economies, the firm said, following behind Germany which would be impacted more after investing significant amounts in China.

Murao also emphasised Japan’s strong manufacturing culture, saying he hoped there would be a shift from exports to domestic consumption. Based in Tokyo, Nomura Asset Management has $536 billion assets under management.