Japan, a favourite travel destination among many Singaporeans (myself included).
It’s little wonder with the country serving up a wide range of mouth-watering food. Coupled with the growing interest in Japanese culture and anime, the country always seem to be overcrowded with tourists.
In fact, Japan welcomed a record 2.73 million visitors in December 2023. This was the highest-ever number of tourists for December and about 8% higher than the pre-pandemic level seen in 2019.
While Japan travel has been booming, its stock market most certainly hasn’t.
The Nikkei 225, a stock market index for the Tokyo stock exchange, has suffered a 30-year return of 0%.
Adjusting for inflation, that’s well into the negatives.
In 2023, however, the Nikkei 225 gained 28%, its fastest expansion in a decade. It ended the year at 33,464.17, the highest level since the Japanese bubble economy in 1989.
If 2023 is any indication, then the Japanese stock market could be on the rise.
A sector due to explode in Japan
Software and information technology (IT) remains a huge opportunity in Japan.
Pictures like the above are commonplace in local Japanese companies.
Imagine all the documentation being lost in the pile or becoming too troublesome/ expensive to store or dispose.
The cost of such an inefficiency can’t be underestimated. It’s this cost that gives rise to an untapped potential.
While tech might have been well integrated in some countries like the United States, Singapore, there is still a long runway for software and tech in a cash dominated country like Japan.
If you believe that tech still have huge growth potential in the U.S, just imagine its growth potential in Japan.
How can we invest in Japan?
If you believe that the worst days of the Japanese stock market are behind them, then you might be thinking of how to gain exposure to Japanese stocks.
Japan’s stock market has largely been overlooked, and not without reason.
Imagine investing in the stock market for more than 30 years without earning a return.
This would leave even the strongest believers in disbelief.
If you were one of them, I wouldn’t blame you for losing faith.
But if you’re still a virgin to the Japanese stock market like me and are looking to lose your virginity, here’s an idea.
As a virgin, I don’t want to be picking individual stocks. I want to lose my virginity in the safest way possible (if that makes sense).
Investing in an unfamiliar market comes with risks that we might be unaware of.
The best way to diversify away risk is by investing a diversified low cost index fund.
If I could only choose one, it would be the iShares MSCI Japan (ticker symbol: EWJ).
As the oldest Japan ETF, EWJ is the most liquid and largest by assets under management (AUM).
The ETF tracks the benchmark MSCI Japan Index, and holds a portfolio of about 225 large cap Japanese equities.
Industrials stocks occupy the largest part of the portfolio, followed by consumer discretionary and IT names.
Since inception in 1996, the returns haven’t been great, but that’s to be expected for a stock market that returned 0% over 30+ years.
Conclusion
The stock markets in the U.S and Japan are more similar than we think.
A common belief is that the U.S stock market is superior to that of Japan. Judging from the returns of the past 3 decades, it’s hard to argue against that.
What might surprise you is: The Nikkei and the S&P 500 have had very similar returns over the last 57 years.
The only difference is that the Nikkei earned all of those returns during one massive 25-year surge, while the S&P 500 has been comparatively more even.
Stocks don’t always go up or down.
Mean reversion provides that all things that go up will eventually come down and vice versa.
The Japanese stock market as a whole has suffered so much in the past 30+ years.
It’s hard to imagine another 30 years of such pain in a free economy like Japan’s (let’s not discuss China).
Mean reversion is due to happen.
It’s not a matter of if, but when.