Japan’s stocks have outperformed European stocks for years but investors are still not buying, raising concerns

Photo: Akio Kon/Bloomberg
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Japanese stocks have outperformed European stocks for many years, but foreign investors have remained skeptical, leading to questions about what the problem is.

Since January this year, the Nikkei 225 in Japan has gained more than 10%, as of its Thursday close, according to CNBC. But the pan-European Stoxx 600 has risen only about 3.43% year-to-date, while the S&P 500 is up 4.2% during the same period.

Japan is traditionally underweighted and “that’s been a massive mistake — versus Europe at least,” John Vail, the chief global strategist at Nikko Asset Management, said, adding that Japan “routinely outperforms Europe by a large margin.”

Nicholas Smith, Japan strategist at CLSA, told CNBC’s “Street Signs Asia”, that the Japanese market has performed “extremely well” since former Prime Minister Shinzo Abe took office for a second term in late-2012.

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For the first time in over 30 years, the Nikkei Stock Average crossed the 30,000 level. But some strategists remain skeptical. They reportedly raised concerns of a market overheating.

“There’s a lot of potential in this market that’s not appreciated by people,” Smith said. “It’s only in Japan that you could talk about a market being overheated when it’s back to where it was 30 years ago.”

During his tenure until resignation in August last year after 7 years in office, Japan’s former Prime Minister, Shinzo Abe put corporate governance in the limelight especially in 2014, setting it as one of the main agendas in its growth strategy, with the hope of luring foreign investors, who often grumble about weak corporate governance among Japanese companies.

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“it’s “certainly not world-class” at the moment and things need to improve, CLSA’s Smith said

“11% of companies were listed subsidiaries of listed entities and therefore, you need more independent directors in that kind of market,” said Smith.

Yet, large numbers of those listed subsidiaries have less than a third of independent directors, he added, citing the Asian Corporate Governance Association’s 2020 biannual ranking that placed Japan in the fifth spot across Asia.

“Profits are doing very nicely, this is an attractive market, but it’ll be a lot more attractive if they … get things improved on corporate governance,” Smith said.

John Vail on the other hand, said corporate governance in Japan has “improved massively,” but admitted it was “not perfect.”

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“Overall, companies do care about profitability now,” Vail said. “There’s corporate governance problems in every region but somehow they get magnified in Japan.”

The conventional Japanese governance structure is one-tier. The board of directors consists of all the directors of the corporation including directors who can represent the company (namely, representative directors).

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