The Japan opportunity: Potential for attractive long-term returns

JAPANESE equities represent a compelling long-term investment opportunity, with the potential for attractive returns over the coming years. While there are some short-term tactical considerations that might keep some investors on the sidelines, these should be considered in the context of the overall opportunity set for the asset class.

Over the next five to 10 years, M&G Investments thinks Japanese equities could plausibly generate an annual percentage compound total return in the mid-teens. The main driver is likely to be earnings, which could grow at an annual compound rate of 8 per cent, a level corporate Japan has indeed delivered over the past decade.

Dividends could also add to the potential return. The stock market’s starting dividend yield is a little under 3 per cent currently, and dividends have also been growing faster than earnings over the past decade. This has been possible because the payout ratio has been increasing – albeit from a very low level – and company balance sheets are strong. An increase in the payout ratio could increase dividend growth by more than 1 per cent per year, in our view.