Why investors are rediscovering Japan

WHAT is it about Japanese stocks that has “confounded” Warren Buffett, ultimately convincing him to make Japan his second-biggest equity allocation globally, after the US?

The answer is no secret, but still may come as a surprise to many. In short, Japan has – steadily and quietly – spent the past few years transforming itself into one of the most attractive markets anywhere in terms of improving earnings yields and capital returns. Just don’t tell that to global investors (or even local investors), most of whom remain chronically under-allocated to Japanese stocks.

After all, Japan is already the second-biggest country weight in most global equity benchmarks. As investors realise what’s on offer, we think there are several reasons why that gap in allocations may be set to narrow. A major shift has played out in Japan over the past decade, and the drivers for it are many: regulatory reforms, corporate innovation, a stronger economy, and a bigger focus on capital efficiency. But it all adds up to a better landscape for investors.