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How to invest in Japan? What to watch out for, what are the specifics and what is the easiest way?

Mart Poom
9. 5. 2023
6 min read

The Japanese stock market has been a big draw for investors lately. Especially because of the news about Warren Buffett's purchases in this country. How can you invest here? What to watch out for and what to look out for?

The Japanese stock market has several specifics.

The Japanese economy has grown very slowly over the past few decades, limiting the earnings potential of many companies. The Tokyo Stock Exchange is therefore not one of the best performing in the world.

Japan is facing rapid demographic ageing and a declining population, which is limiting demand for many products and services. This means that companies have to fight all the harder for fewer customers. A large part of the Japanese economy is dependent on exports, especially to China and other Asian countries. Economic problems in these countries can thus have a major impact on exporters.

The Japanese stock market is dominated by the financial sector in particular, which increases the market's vulnerability to falling asset prices and other problems in the global financial sector. High valuations. The prices of many Japanese stocks are already generally considered overvalued, so further price gains could be limited. Shareholders are also no longer investing massively in potentially successful new companies.

The Japanese stock market is dominated by the financial sector. Source:

This would be specific to Japan as a whole.

Advantages of investing in Japan

Japan is the third largest economy in the world and is home to global powerhouses such as Nintendo, Toshiba and Honda.

Analysts say, "Japan is a proxy play against China with no political risks. It provides exposure to a mature Asian market with the world's leading companies."

"Japan's impressive earnings growth over the past decade has been achieved in volatile macroeconomic conditions and in a context of relatively low sales growth. Earnings growth has been the result of a focused effort by the corporate sector to improve, streamline and increase competitiveness."

Before we look at how to invest in the Japanese stock market, let's go over some background information. Japanese stocks are traded on the Tokyo Stock Exchange (TSE), which is Japan's main stock exchange and part of the Japan Exchange Group (JPX). The JPX was formed on January 1, 2013 by the merger of the Tokyo Exchange Group and the Osaka Stock Exchange.

There are just under 4,000 companies on the exchange, making it the third largest stock exchange in the world by market capitalization after the New York Stock Exchange (NYSE) and Nasdaq. While the TSE is the main exchange, Japan's most popular stock index is the Nikkei 225 (Japan225), which tracks the performance of 225 large companies in a variety of industries.

Investing in Japan in the conventional way is not difficult. There are several ways to do it.

Shares

Direct investment in individual Japanese stocks. You can buy shares of Japanese companies traded on the Tokyo Stock Exchange (TSE) or the Osaka Stock Exchange (OSE) through your traditional broker that offers Japanese stocks.

Typical representatives include video game titles such as $NTDOY

While the share prices of many US gaming companies are plummeting with rising interest rates, Nintendo has managed to stand out. Unlike other video game company stocks like Roblox and Take-Two, Nintendo's stock hasn't seen a big drop. Fuji $FUJIY, which boasts world leadership in several sectors, has just as much potential. In addition, the likes of Toyota, Sony and Honda have ADRs.

The largest Japanese companies in general include Mitsubishi, Itochu, Sumitomo, Mitsui, Marubeni.

Most conventional brokers allow ADR trading, which can be cheaper than trading Japanese stocks through a broker based in Japan. In addition, when using a Japanese broker directly, you expose yourself to other specifics such as the language barrier.

What is ADR?

Shares of most foreign companies that trade in the U.S. markets are traded as American Depository Receipts (ADRs). These shares are issued by American depository banks. Each ADR represents one or more shares of a foreign company or a fraction of a share.

The selection of Japanese stocks at conventional brokers is somewhat more limited. But you can find the main titles, and if you're looking for the bigger specialties, then you'll have to reach for a Japanese broker.

ETFS

If you want to diversify then the same applies as in our terms. Buy ETFs. There are a number of funds managed by Japanese companies that invest in Japanese stocks. These funds trade on the TSE and OSE and are open to foreign investors. Some international funds and ETFs offer exposure to the Japanese stock market through replications of indices such as the Nikkei 225 or Topix.

Typical ones include

- iShares MSCI Japan ETF $EWJ+0.0% - replicates the broad MSCI Japan index, focusing on large and mid-cap companies. It is one of the largest and most traded Japanese ETFs.

- iShares JP Morgan USD Japan ETF - replicates the JP Morgan Japan index, which includes approximately 400 large and mid-cap Japanese companies.

- Vanguard Japan ETF - Vanguard's proprietary index ETF focused on the Japanese stock market with low management fees.

- WisdomTree Japan Hedged Equity ETF $DXJ+0.0% - An index ETF focused on large and mid-cap Japanese companies that brown-sets currency exchange rates. Uses currency hedging (hedge).

- Franklin FTSE Japan ETF $FLJP-0.2% - An index ETF focused on large and mid-cap Japanese companies with a focus on value. It tracks the FTSE Japan index.

Of these options, the easiest and most accessible route for foreign investors will be through international funds and ETFs replicating Japanese indices or investing in individual Japanese companies traded outside Japan. However, direct investment in Japanese companies may offer greater profit potential.

EWJ
$69.00 $0.005 +0.01%
1 Day
+0%
5 Days
+1.95%
1 Month
+4.25%
6 Months
+13.98%
YTD
+8.4%
1 Year
+22.03%
5 Years
+25.3%
Max.
+14.36%

Warren Buffett

I mentioned in the introduction that Warren Buffett has taken a liking to Japan and has even visited it, announcing that Berkshire Hathaway has increased its investment there to 7.4%. Overseas investors followed suit and bought $7.83 billion worth of Japanese stocks in five days of trading.

Buffett said companies like Itochu, Marubeni and Mitsubish are comparable to Berkshire itself. They have diversified portfolios with long-term investments and a focus on value and cash flow. And he's invested in them, too.

"These are big companies. I liked them as soon as I saw them. They were companies where I generally understood what they were doing. Somewhat similar to Berkshire in that they owned a lot of different sectors and offshoots," Buffett said. And they were selling at a price that I thought was ridiculous, especially compared to the interest rates that prevailed at the time."

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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