One recent study by financial services firm HSBC shows that affluent, deep-pocketed investors regularly spread their investments, including investments in non-home countries.
But simply spreading portfolio assets around the globe doesn’t necessarily insulate investors from volatility. After all, global markets are more interconnected than ever, as evidenced by the recent gyrations in both US and international markets.
Why are Japanese stocks down?
A sharp 12.4% plunge in Japan’s benchmark Nikkei 225 index triggered a major stock selloff in global bourses on August 5.
The Dow Jones Industrial Average slid by over 1,000 points, while the S&P 500 and Nasdaq 100 indexes fell by 3% each that same day. Market analysts pointed to a rare decision by the Bank of Japan to boost interest rates as a primary driver of the market losses.
That move led to the unraveling of the so-called “carry trade,” in which investors snapped up the Japanese yen at low rates to purchase higher-risk foreign securities like US stocks.
That scare proved temporary, however, as the Nikkei rebounded and traded 10.2% higher on August 6, almost erasing the loss it experienced a day before.
While it will take time for markets to digest the developments of the past few days, Japanese stocks still have a lot going for them.
Performance of the Japanese market
The Japanese stock market has been somewhat overlooked, with media attention focused on the US, China and the eurozone but, performance-wise, Japan’s market has largely been on the rise in recent years.
A case in point: As of July 31, 2024, Japan’s benchmark Nikkei 225 index returned 150% over the last 10 years. That’s not far off the 186% returned by the S&P 500 stock market index over the same time frame, not including dividends.
As of August 6, those 10-year returns are still strong but have been cut to 129% and 173%, respectively.
Factors influencing the Japanese stock market
Why the increasing interest in Japanese stocks? Experts point to multiple flashpoints and emerging trends.
- Higher wages: Inflationary indicators are rising in Japan. Often, that’s a red flag to economists, but not in the case of Japan. The country’s workforce is seeing its biggest pay hikes in several decades, triggering an uptick in the country’s business performance.
- Global companies are sinking cash into Japan: With some harsh lessons learned from the two-year-long worldwide supply chain crisis, businesses are shifting assets to Japan, which offers product transport diversity, an expanding technological knowledge base and lower investment costs tied to a less-than-robust Japanese yen.
- Higher corporate earnings: Japanese companies are seeing some of their most profitable earnings since 1989 market highs. Average earnings per share are up about three times what they were all those years ago.
- More public company transparency: Japanese companies have grown with younger, more accessible C-suite executives and more independent corporate boards who go out of their way to court long-walled-off investors and analysts. That level of transparency wasn’t on the table in previous generations of CEOs, but it is now.
- There is more cash in the pot: In-country businesses hold very high levels of cash, and many are more open to investment-attracting moves like dividend payouts and stock buybacks.
With its economy picking up steam and as investment dollars flow into the country, Japan has hit the reset button in a major way.
Future outlook of the Japanese stock market
“Japan’s stock market has long fascinated investors, and recent years have only amplified this interest,” said Ryan Jacob, chairman and CEO at Jacob Asset Management in Hermosa Beach, California. “Despite its ups and downs, Japan remains a land of opportunity for those willing to explore its unique economic landscape. The combination of robust corporate reforms, undervalued stocks and exciting investment strategies makes Japan an attractive destination for savvy investors.”
Former Japanese prime minister Shinzo Abe (who was assassinated in 2022) deserves much credit for his country’s economic turnaround.
“The ‘Abenomics’ public policy reform in Japan, which started in 2013, is finally materializing, and the market-wide trend of corporate governance improvement and shareholder return enhancement are positive developments for Japan’s stock market,” said Masakazu Hosomizu, partner at Curi RMB Capital in Chicago, Illinois, and portfolio manager for the RMB Japan Fund (RMBPX). “These changes will result in the re-valuation of Japanese stocks, potentially leading to higher future valuations. Further, the lower value of the Japanese yen compared to the US dollar allows US investors to purchase Japanese stocks at cheaper prices.”
Considerations before investing in Japanese stocks
If Japan is a good fit for your investment portfolio, job one is to get help. While overseas investing is easier than ever, prepare for your Japan trading experience with these action steps.
Do your homework
Part of the problem with US investors bypassing Japan is basic geography. After all, Tokyo is 6,700 miles away from Wall Street. Adding Japanese stocks to your portfolio means studying key considerations before investing.
“That includes understanding cultural differences and business practices in Japan, keeping track of political and economic developments, and conducting thorough research on individual stocks before making investment decisions,” said Michael Collins, a chartered financial analyst (CFA) and the founder and CEO of WinCap Financial in Winchester, Massachusetts.
Also, start your research with familiar companies or industries aligning with your investment goals and risk tolerance. “Keep up with current events and economic indicators in Japan to make informed investment decisions,” Collins added.
Focus on exchange rates
The currency exchange rate is important for US investors when investing abroad.
“In current conditions, the exchange rate works in the favor of US investors, allowing them to purchase Japanese stocks at a discount based on the strength of the US dollar compared to the Japanese yen,” Hosomizu said. “Trading hours are another consideration given the time difference between the two countries when trading locally. ADRs are traded during US trading hours, thus making it easier for US-based investors.”
What are ADRs?
American Depositary Receipts (ADRs) are bank-issued securities, listed on either major US exchanges or via the over-the-counter market, that represent shares of stocks from foreign companies.
“ADRs are the easiest way for most US retail investors to purchase Japanese stocks,” Hosomizu said. Many US broker-dealers have international accounts where US investors can purchase local Japanese stocks.”
Hosomizu added that these types of accounts will likely have “other restrictions” like high minimum account balances and may be limited to investors who can meet a certain accreditation level.
Some Japanese ADRs are household names like Sony (SONY), Toyota Motor (TM) and Honda Motor (HMC). “These companies dominate their respective industries and provide a gateway to Japan’s market potential,” Jacobs said.
The biggest Japanese ADRs
US investors will likely recognize several more names on the following list of the biggest Japanese ADRs by market capitalization:
How to buy Japanese stocks
When trading Japanese stocks, you have several options.
Go in-country
You can open a brokerage account with a Japanese company and trade directly on the Tokyo Stock Exchange, but language barriers and not being a Japanese national may present obstacles. If you are a Japanese citizen and know the language, you could open an account with a Japanese brokerage firm like SBI Securities or Rakuten Securities, which accommodates foreign traders.
Opt for US trading firms
You can also open an account with a US or international brokerage firm or trading platform with direct access to the Japanese markets.“For Americans, investing in Japanese stocks is easier than you might think,” Jacobs said. “Platforms like Interactive Brokers and Schwab offer international coverage, allowing you to buy Japanese stocks directly. You can also invest in Japan-focused mutual funds or ETFs that track indices like the Nikkei 225 and TOPIX, providing broad exposure to the market.”
Open the account
Like any investment account, you’ll need to provide personal information like your name, address, contact information, bank account information and Social Security number. You’ll also be asked to fund the account before you begin trading. Check beforehand if there’s a minimum balance required to open an account.
Commissions vary between brokerage firms, but any established international trading platform can provide easy access to the Japanese financial markets.
Know the rules
Investing in Japan is different than investing in the US.
For starters, you may have to buy at least 100 shares of Japanese stocks to clear your order. Minimum stock purchases may vary in Japan, so check with your broker before you fund your trading account. Also note that the Tokyo Stock Exchange lists stocks by a four-digit number, which you’ll need to know when making a trade. Expect to pay in-country taxes when profiting from any trades in Japan as well.
Common platforms for purchasing Japanese stocks
- Interactive Brokers: This international broker offers low trading fees and an advanced trading platform.
- Charles Schwab: Schwab offers a global account that allows for stock trading directly in international markets.
- Fidelity Investments: Not only is Fidelity our pick for best brokerage account given its domestic investment capabilities, you can register to trade international stocks as well, including those in Japan.
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Frequently asked questions (FAQs)
Thanks to sound public policy changes made a decade ago, a rebounding economy has turned the Japanese financial picture around. Higher labor wages and rising corporate earnings have attracted global investment in recent years.
As of August 6, 2024, the benchmark Nikkei 225 index has returned 129% over the last 10 years, which trails the 173% price gain in the US stock market over the same timeframe.
With deflation finally ending and renewed consumer confidence, analysts estimate single-digit earnings growth for Japanese companies, which should keep market momentum rolling forward despite recent setbacks.
