The Case for Japanese Equities

A Structural Transformation

Japan is undergoing its most significant corporate governance transformation in decades. The Tokyo Stock Exchange's initiative to improve capital efficiency has catalysed a wave of changes across corporate Japan:

• Share buybacks reached a record ¥9.6 trillion in fiscal 2025
• Cross-shareholdings are being unwound at an accelerating pace
• Board composition — the percentage of companies with majority independent boards has risen from 12% to 41% in three years
• ROE improvement — aggregate ROE for the Topix has risen from 8% to 11%, with further gains expected

Valuation Opportunity

Despite the recent re-rating, Japanese equities remain attractively valued. The Topix trades at 14.5x forward earnings, a meaningful discount to both U.S. (20x) and European (15.5x) markets — despite higher earnings growth forecasts.

Our Focus Areas

1. Industrial automation — Japanese companies hold dominant global positions in factory automation, robotics, and precision instruments
2. Specialty chemicals — world-leading positions in semiconductor materials and advanced coatings
3. Financial services — banks and insurers are benefiting from the end of negative interest rates

Currency Considerations

The Japanese yen remains historically weak at approximately ¥148 per dollar. We view this as a further tailwind for our thesis — Japanese exporters' earnings are boosted by the weak yen, while a potential yen strengthening would enhance unhedged returns for foreign investors.

We maintain a 50% currency hedge on our Japanese equity exposure, balancing the potential for yen appreciation against the current carry cost of hedging.