Why are international investors suddenly interested in Japanese equities?

According to Man GLG, Japan stocks are poised to outperform global counterparts this year as improving corporate governance standards and possible normalization of central bank policies polish the nations’ appeal to foreign funds.

Warren Buffett’s latest market approval and the end of global rate hikes are also positive catalysts, according to Jeffrey Atherton, head of Japanese equities at UK-based Man GLG, a part of hedge fund Man Group Plc.

In the medium term, we are very optimistic, Atherton said in an interview last week. It seems that the pace of change in Japan is accelerating.

Atherton is lead manager of the Man GLG Japan CoreAlpha Equity fund, which has gained 18% over the past year, beating 94% of its peers, according to Bloomberg data. He and his co-managers Adrian Edwards, Stephen Harget and Emily Badger were ranked the second best asset managers in Japan by Citywire in February, based on average total returns over the past 12 months.

The Tokyo Stock Exchange sparked a rally in some Japanese stocks in February by saying it would ask companies trading below book value to come up with capital improvement plans starting in the spring. Buffett, a well-known value investor, added to the optimism this month when he said he had increased his holdings of Japanese stocks.

Many investors are still unaware of the corporate governance movement and see Japan as a global cyclical market, Atherton said. News of Buffett’s investment has an effect on sentiment, but hopefully also on foreign money actually entering Japan, which hasn’t happened for years.

The broad Topix index of Japanese stocks is up 7.4% over the past 12 months, while the MSCI All-Country World Index is down 5.5%. However, the outperformance has eased, with the MSCI gauge slightly beating the Topix this year.

Looking ahead, Atherton said two of the most important things to watch are corporate earnings and the next two BOJ decisions for any further signs of policy normalization.

There is a good chance that the BOJ will tell us what it will do by the end of June, and that the next three months could actually pave the way for the second half of the year, he said.

According to data collected by Bloomberg, the top holdings of the Athertons fund include Panasonic Holdings Corp., Sumitomo Mitsui Financial Group Inc. and Mitsubishi Estate Co.

Atherton said he favors unloved, domestically-focused stocks, including those in the retail, real estate and construction sectors.

The government and BOJs are pushing to keep inflation steady at around 2%, the country’s post-Covid reopening and stronger purchasing power due to over-cutting during the pandemic are all likely to boost corporate spending and revenue, said he.

Atherton said they were a little less positive about the financial sector, adding that the collapse of Silicon Valley Bank showed what can happen when a bank goes wrong. At the same time, insurers are in a better position because they are not as exposed to liquidity problems when Japanese interest rates may rise, he said.

Even after last year’s rally, major Japanese stock indices are still well below their historic peaks. The Nikkei 225 stock average is currently around 26,650, having closed at 38,915.87 in December 1989, before the collapse of what became known as the bubble economy.

The current market is still lower than where I started, said Atherton, who has more than three decades of experience as a manager of Japanese equities. I’m hopeful that Japan will go through that 39,000 level at some point in the not-too-distant future, hopefully before I retire, he said.