Numerous developed market currencies have weakened against the US dollar this year and while both sterling and the euro have unquestionably faltered in the face of Fed tightening, the yen has suffered too.
With the Bank of Japan purchasing an unlimited supply of bonds to keep 10-year government yields below 0.25%, there’s every indication that the nation plans to keep the lid on long-term borrowing fastened and maintain their ultra-loose monetary policy.
As far as we’re concerned, whether or not ‘yield curve control’ is justified is largely irrelevant. Either way, the fact remains that such actions have helped to drive the yen to its lowest value against the greenback in more than two decades.
As income investors, the strength or otherwise of the Yen does not affect our long-term view of Japan or, indeed, our stock selection, but right now we believe this short-term weakness is presenting foreign investors with an excellent opportunity to get exposure to Japan’s growing pool of quality income stocks.
Pushing forward
Japan’s approach to shareholders has improved considerably over the past decade. The work began in earnest under former prime minister Shinzo Abe, who introduced the nation’s first corporate governance and stewardship codes back in 2014.
More recently, however, these efforts have shifted far beyond the political sphere alone – most notably with the Japan Exchange Group’s major ongoing reform of the Tokyo Stock Exchange.
In 2019, before the dark days of the pandemic, the Nikkei dividend index recorded its 10th straight annual rise and its seventh consecutive annual all-time high. The year before that, Japanese companies announced an unprecedented $55.6bn of share buybacks.
When Covid-19 hit and devastated dividends across much of the Western world, Japanese companies took the opportunity to double down on their newfound commitment to corporate governance. Their cover allowed them to remain resilient, cutting and cancelling pay-outs far less than peers through even the worst conditions.
Back on track
What’s most encouraging right now, however, is the suggestion that dividend growth among Japanese companies is returning to pre-pandemic levels.
Figures from Morgan Stanley following 2021 results season, for example, showed that share buybacks soared last year as Japan’s economy rebounded from the throes of the pandemic. In fact, they hit 7.4trn yen – 44% higher than 2020.
Moreover, with the investment bank forecasting all-time record buybacks of 9.8trn yen in 2022, it seems the upward trend that had long been in place prior to the pandemic is now on track to resume.
They also highlighted in a recent report how the 12-month forward earnings per share estimates for the Topix have risen by 2.7% since March 2022 and 5.7% in the six months to August 2022.
“Strong earnings,” the investment bank claims, “have helped Japanese companies to lift their dividend pay-outs along with progress towards a record year of buyback announcements.”
This is further demonstrated by average pay-out ratios among Japanese companies, which are now beginning to normalise after a Covid-induced drop.
So, what does all this mean?
Well, for one thing, increasing dividends in the immediate wake of a period of enormous uncertainty and turbulence points to balance sheet strength – a positive indicator for any investor. Likewise, growing levels of buybacks also suggest that many companies believe that they are being severely under-valued in the market – another sign of strong fundamentals of companies.
But perhaps most importantly, the emerging resumption of dividend and buyback growth demonstrates that the commitment among Japanese companies to improving their corporate governance standards is unwavering.
This sets Japan on course to be a long-term play for income investors. With this in mind, the short-term weakness of the yen offers an appealing entry point to foreign investors wanting to get exposure at an attractive valuation.
Richard Aston is portfolio manager of the CC Japan Income & Growth Trust. The views expressed above should not be taken as investment advice.