The Nikkei 225 stock index has risen 16 percent this year and the broader Topix index 13.9 percent, making Japan’s equity market a surprise star performer in 2023.

In the five weeks leading up to 17 May, foreign investors dumped about a net $30 billion into the country’s stocks and futures markets, one of the richest stretches in the past ten years, according to the Financial Times.

Investors see corporations taking shareholder interests more into consideration and raising standards of corporate governance, the FT said.

Also, Japan is benefiting as Western nations look for trading partners not named China. However, because of Japan’s extensive trade with China, investors in Japanese companies still can benefit indirectly from China’s economy.

Japan could be “the best not-China option for a global investor,” Shrikant Kale, equity strategist for Japan at Jeffries, said to the FT. 

“Some investors think that Japanese companies have a big exposure to the upside in China but also that you can own them as a hedge against the geopolitical risk,” Yunosuke Ikeda, head of Japanese equity strategy at Nomura Securities, told the FT in an interview.

Also, Japan’s business policies have remained stable for long periods, while Beijing springs crackdowns or policy shifts on industries or individual companies without warning, analysts pointed out.

“It’s not lost on investors that the rule of law is taken seriously and the corporate governance regime is quite favorable to owners of equities,” Carl Vine, Asia-Pacific equity co-manager at M&G Investments, told the FT.

After years of returns that pale in comparison to those available in other nations, Japan’s stocks are now seen as undervalued opportunities, the FTnoted.

That perception was sharpened last month when Warren Buffet made a visit to Japan and announced he was adding Japanese stocks to Berkshire Hathaway’s portfolio.

Also, Japan’s stocks still have room to run. Asset managers were 11 percent underweighted in Japan, according to Bank of America’s most recent survey of global investment funds.

The rise in Japanese share values owes much to the Tokyo Stock Exchange, which has pressured companies to tighten their cost structures and financial ratios.

Because of the exchange’s influence, “more has happened in the last two years than in the last 30,” Japan strategist Jeff Atherton at hedge fund Man GMG told the FT, adding that pressure from the exchange was the chief reason that Japanese stock values have shot up.

“It’s not Warren Buffet turning up that makes this interesting,” Vine at M&G said. “He’s observing what others are observing.”

TRENDPOST: While share prices are still low, Japanese corporations are buying back their own shares at a record clip, putting up the equivalent of $71.4 billion to do so in the fiscal year ending 31 March. 

They have joined a global buyback trend that we detail in “COMPANY STOCK BUYBACKS SET RECORD, SPARK INVESTOR COMPLAINTS” in this issue.

Analysts expect Japanese buybacks will set another record by the end of this month.