Is it wise to invest in Japan right now?

This week, Japan will name its first female prime minister

Is it wise to purchase Japanese stocks and investment trusts at this time?

Although the Japanese stock market is usually disregarded and misinterpreted, this might be the ideal moment to think about making an investment in Japan.

Although the top stocks and funds for do-it-yourself investors tend to be more domestic and US oriented, many investors are searching for ways to diversify their approaches. In view of the numerous stock market selloffs brought on by tariffs this year, this is especially true when it comes to removing investments from the US.

In the meantime, a number of corporate governance changes from the Tokyo Stock Exchange are significantly altering the performance of Japanese stocks. These reforms have been carried out by his successors since they were started under the late Shinzo Abe, who served as Japan's prime minister from 2012 to 2020.

"There's basically a governance revolution going on," says JPMorgan Japanese Investment Trust co-manager Nicholas Weindling (LON:JFJ).

Japanese businesses have historically been overcapitalized, with their balance sheets containing enormous amounts of cashsometimes billions of dollarsas well as shares of other businesses and real estate.

According to Weindling, "all of that is changing,". "The Tokyo Stock Exchange and the government have actually told them that the return on equity is too low, that it is improper to sit with so much money, and that they should take action.

The first female prime minister of Japan will be Sanae Takaichi, a former heavy metal drummer and follower of both Abe and Margaret Thatcher. Analysts believe it is unlikely that opposition parties will prevent Takaichi from becoming prime minister, even though the country's ruling Liberal Democratic Party (LDP) lost its majority in both houses of the National Diet (Japan's governing body) after she was elected leader on Saturday, October 4.

Nicola Takada Wood, managing director, Japan at Asset Value Investors, says, "I think what Takaichi is known for is that she is fiscally expansionary and that she is a strong believer in Abenomics." She supports loose monetary policy and wishes to make investments in industries like space, semiconductors, and defense.

Corporate governance changes may continue to attract Japanese investment.

The recovery of the Japanese stock market in recent years has been largely attributed to corporate governance reforms.

Richard Aston, portfolio manager for the Chikara Japan Income and Growth Fund and CC Japan Income and Growth Trust (LON:CCJI), says, "Every now and then, people get renewed enthusiasm for corporate governance reform and talk about it as if it's something new." "The truth is that getting here has taken 12 years. But most importantly, it's not finished yet.

According to Takada Wood, corporate governance reform is only beginning.

She stated, "I don't think we're even a third or even a quarter of the way through what's going to happen in terms of corporate governance reform," noting that the Tokyo Stock Exchange currently only believes that about 15% of Japanese companies are adopting reforms successfully.

Because some high-potential growth companies are now able to increase their returns to shareholders, Aston contends that the corporate governance reforms have the potential to upend the conventional dichotomy between growth and income stocks in Japan. He claims that "these companies are now in a strong position to complement that return with distributions, as they haven't had this relationship with shareholders historically."

The macroeconomic outlook for Japan.

In addition to the reform of corporate governance, Japan is benefiting from other macroeconomic factors.

Japan is back to inflation after decades of being in a deflationary spiral.

According to Takada Wood, "people are saying that inflation is too high right now, but that's because the Yen is so weak." Inflation has been imported. About 2 percent of it is food and energy, which, when separated, is very healthy, she says.

It is not surprising that businesses and individuals tend to hoard cash in light of the recent deflationary history. Cash effectively gains value over time in these circumstances.

"The typical Japanese individual allocates 55 percent of their income to cash," Weindling says. "That's a wise choice in a deflationary climate.

However, this protracted inflationary period has begun to alter Japanese attitudes.

A period of consistent wage increases has also occurred during that time; before 2020, wages had been stagnant for 15 years. Consumption may increase as a result.

However, Weindling points out that it isn't always important when choosing whether to invest in Japan because, like UK stocks, there is a significant gap between the Japanese economy and the Japanese stock market.

He claims that although the Japanese economy hasn't expanded in 15 years, the country's earnings per share growth over the same time period is equal to that of the S&P 500. It's amazing because the S&P is re-rating to ever-higher multiples, but Japan is still trading at a huge discount to that and other major markets, even though its earnings per share growth is exactly the same.

How to make investments in Japan.

Direct access to Japanese stocks may be available through certain platforms and brokers.

If that's the case, there are hundreds of options available beyond the stocks associated with technology and cars that many investors think of when they consider the Japanese stock market.

According to Weindling, "consider something like ASICS (TSE:7936)." Many Western consumers are familiar with this top sports footwear brand, but many are unaware that it is an example of Japanese design.

Takada Wood selects Rohto Pharmaceutical (TSE:4527), emphasizing that it is not a pharmaceutical company but rather the top skincare and eye drop brand in Japan. Because people value it as a pharmaceutical company, which it isn't, Takada Wood claims that it is "really undervalued."

Although you can try to choose your own Japanese stocks, it's usually more convenient to invest through a fund or investment trust to get exposure.

The three investment trusts with a focus on Japan discussed in this article offer various ways to gain exposure to Japan through their investment approaches.

In line with its overarching strategy, Asset Value Investors oversees the AVI Japan Opportunity Trust (LON:AJOT), which focuses on activism with its investments.

"We present ourselves as management consultants; we tell businesses that after analyzing their business, we think they are excellent at X, Y, and Z, but that they have problems in other areas, which is why their valuation is low.

In keeping with this, AJOT has been collaborating closely with Rohto, which has been overspending on supposedly growing areas that haven't expanded, and convincing management to return their focus to their core businesses, where they have a strong market share and substantial profit margins.

The investment trust and fund are supported by Chikara's Japan strategy, which concentrates on businesses and industries that have the potential to expand over time and produce more consistent cash flow and returns.

"Were not necessarily an income fund," Aston explains, "in the way that people view income funds, perhaps in the UK, where many of the companies that offer high income are broken or troubled companies."

As of October 10, the largest dedicated investment trust, with a market value of more than £1 billion, is JPMorgan Japanese Investment Trust. With 20 analysts based in Tokyo, it is present in the city and prioritizes growth and quality.

"On a multi-year basis, we were searching for the best investments in Japan," Weindling says.

These investment trusts were trading at the following discounts as of October 10th.

"Association of Investment Companies" is cited.