A finews.asia series takes us to some of the favorite places fund managers choose to spend their summers. First stop: Tokyo.

By Daniel Hurley, Portfolio Specialist Japanese Equities, T. Rowe Price

Many people go to Japan in the summertime, and it really is worth it. Large and small summer festivals, so-called natsu maturi, take place all over the country, and people are drawn to the beaches, for which Chiba Prefecture, for example, is particularly famous.

In addition, certain foods are particularly popular in summer, and that doesn't just mean delicious ice cream sundaes – though these ice creams can be a lifesaver! In summer the temperatures reach over 30 degrees - and that, depending on the region, lasts almost continuously from July to the end of September. It is also extremely humid. The freshwater eel unagi is a typical summer dish, as are cold noodles (Hiyashi Chūka) or Tōfu (Hiyayakko).

Many National Holidays

Unlike in Switzerland, people enjoy magnificent fireworks festivals almost exclusively in summer, which have been held since the mid-18th century, originally to commemorate the deceased. National holidays such as the Day of the Sea in July as well as the Festival of the Dead, O-Bon, and the Day of the Mountain in mid-August offer locals the opportunity to indulge in summer activities in Japan. However, it is around O-Bon time that people travel extremely frequently, which also means that trains can be particularly crowded.

The domestic economy is recovering strongly after the pandemic, domestic consumption is on the rise again and Tokyo and the bullet train are full of tourists. China's economy is also reopening and recovering, and the country remains Japan's largest trading partner, giving a boost to several Japanese exporters and industrial companies. As a result, investors are now looking at Japan as a way to benefit from China's reopening without investing directly in China.

Daniel Hurley, Portfolio Specialist, T. Rowe Price (Image: TRP)

Given current market conditions, we see opportunities to invest in «quality growth» companies that are able to steadily increase their earnings growth over time, as well as «transformational» companies that prioritize improvements in corporate governance and shareholder returns. We also see signs that the outperformance of Value over Growth over the past two and a half years is restrained, as Growth appears oversold after a hasty rotation. Japan's favorable exchange rates could also create a favorable environment for Growth stocks, and active stock selection and fundamental analysis are key to identifying these companies.

Delicate Task

Although we are optimistic about the future of the Japanese equity market, there are several potential challenges that need to be addressed. These include the possibility of a global economic slowdown and the delicate task of normalizing monetary policy without negatively impacting exporters. It is therefore important to strike a balance, as tightening too much or too fast could lead to currency appreciation and hurt exporters, who play a crucial role in Japan's economy and TOPIX.

Moreover, the corporate governance reforms introduced by Abenomics in 2015 have laid a solid foundation for higher shareholder returns, which are now becoming increasingly visible. Activist hedge funds, domestic investors and corporates, followed by foreign investors, are taking notice. Buybacks have broken records over the past four years, reaching an all-time high in the March 2023 financial year.

Historically Undervalued Market

We believe the market has yet to fully recognize this trend, and as the discount to the dollar continues to narrow and the market becomes more selective, it is critical for foreign investors to identify companies with management teams willing to embrace reform and address existing issues.

Japan's historically undervalued market offers an attractive value proposition to foreign investors, making the country an even more attractive investment destination. Warren Buffett's visits, purchases and praise of the opportunities he sees in Japan have certainly boosted Japanese equities recently.