Rediscovering Japanwith Nomura Asset Management
Andrew McCagg
Senior Client Portfolio Manager
Published July 2023

Japanese equities have been one of the top performers over the first half of 2023, gaining 22.69%
in local currency terms through the end of June (TOPIX). As such, many investors have started toquestion whether they have missed their chance to participate in the market rally. However, there
are several reasons to believe Japan still has significant upside, especially relative to otherdeveloped markets.
Robust Domestic Economy
While a large piece of Japan’s upside is tied to the continued improvements in corporate governanceand shareholder returns over the long term, there are also reasons to believe that Japan will havepositive relative returns in the shorter term as well. Speculation over whether central banks need toinduce a recession to tame inflation may be gaining speed, but the OECD Composite Leading
Indicators by region in Chart 1 clearly show Japan is in a relatively stable position. Our GDP forecast
in Chart 2 also calls for Japan to benefit from the continued domestic post-pandemic recovery to see
quarter-on-quarter (q/q) growth throughout 2023, compared to expectations for US and Eurozone
GDPs to contract q/q in the second half of the year. Looking ahead to 2024, we believe Japan’s q/q
GDP growth will remain higher than Europe and comparable to the US.
Chart 1: Regional Composite Leading Indicator

3.0 (q/q, %p.a.)(long term average=100)
102

Japan
US101

Chart 2: In-House GDP Forecast

Germany
Global (G7)Japan
USEurozone

2.5
2.0
1.5
1.0
0.5

100

0.0
-0.5

99

-1.0

(Forecast)-1.5
98
Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23

Q1Q2

Q32023

Q4Q1

Q2Q32024

Source: Chart 1: OECD Composite Leading Indicator by region, September 2021 to May 2023, monthly. Chart 2t: Nomura AssetManagement, Forecast for Q2 2023 and thereafter.

Q4

Tourism BoostA full recovery in in-bound tourism is expected to drive Japan’s continued domestic recovery goingforward. Based on the January to March data provided by the Japan Tourism Agency and theMinistry of Economy, Trade and Industry, we forecast consumption by international visitors to havean economic impact of over 4.4 trillion JPY in 2023, which would amount to 0.8% of nominal GDP,as seen in Chart 3.
Chart 3: Inbound Spending & Economic Impact

Chart 4: Visitors to Japan (Jan-Mar 2023)（JPY, bn）
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0

Singapore
2%
Philippines
2%

Others15%

South Korea
33%

Australia
3%
Total
4.79
million2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

(Yr)

Tourism consumption(JPY, bn)

2019

2023*

4,814

4,241

4,023

3,544

1,003

884

5,026

4,428

0.9

0.8

China
3%
Vietnam3%↓
PrimaryeffectSecondaryeffectTotalspilloverspillover% of nominal GDPThailand
5%
US8%

Taiwan17%
Hong Kong
9%

Source: Chart 3 Top: Nomura Asset Management based on Japan Tourism Agency. As of March 2023. Bottom: Nomura AssetManagement based on the Ministry of Economy, Trade and Industry's analysis data. *Estimate using data as of March 2023. Chart 4:
Japan National Tourism Organization

Additionally, there is good reason to believe these estimates may be low, as the January-March data
had minimal contribution from China. At the peak of inbound spending in 2019, Chinese visitors
made up approximately one-third of the total visitors, and accounted for over 50% of the total
consumption by inbound tourists. As Chart 4 shows, however, Chinese visitors comprised only 3%of the total visitors in Q1 due to country-specific border restrictions implemented by Japan in reaction
to the abrupt end to China’s zero-COVID policy. These restrictions have since been lifted as of theend of March, and a recovery in Chinese tourists to Japan could significantly raise the forecasts
given above. Of course, even if the Chinese impact disappoints, the continued domestic recovery isstill expected to help offset global recessionary concerns and keep Japan in a relatively favorable
position over the next 12 months.

Nomura Asset Management | Rediscovering Japan

Page 2

Improved Corporate Governance
Chart 6: Investors’ Shareholding at Market Value

Chart 5: Return to Shareholders(JPY, tn)
30

Forecast
Dividend

Share Buyback(%)
40
3525

ForeignInvestors

30
2025
BusinessCorporations
FinancialInstitutions

20151510105500
1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
(FY)

70 75 80 85 90 95 00 05 10 15 20

Domestic
Individuals
Investment
TrustsSecurities
Companies
AnnuityTrusts
Govt. &Local Govt.

(FY)

Source: Chart 5 Nomura Asset Management based on Nomura Securities data. Nomura Asset Management based on Nomura Securities
data. FY1996 - FY2023. For all listed companies’ actual ordinary shares excluding preferred shares buybacks as well as shares purchasedfrom the Resolution and Collection Corporation. Share buybacks and dividends for FY2023 are Nomura's forecast as of the end of June
2023. Chart 6: Note: FY1970 - FY2021. Financial institutions indicate financial stocks acknowledged by the TSE excluding investment
trusts and pension funds. Source: NAM based on TSE “Share ownership Survey” data.

That being said, it’s the longer term potential that truly makes the Japanese market so attractive,
even after the year to date rally. Investors who have followed Japan closely over the years are likely
tired of hearing about the changes in corporate governance and increased shareholder returns, but
it’s a story worth repeating here once again. As Chart 5 shows, shareholder returns have more thandoubled in the last decade, increasing from approximately 10 trillion JPY in 2013 to approximately25 trillion in 2022, but payout ratios in Japan remain in the 30% range compared to over 90% forcompanies listed on the S&P 500. Pessimists may see the fact that payout ratios remain low as alack of real change because the increased shareholder return is more a reflection of improved
earnings. However, the remaining high levels of cash and retained earnings are a strong basis forthis trend of improved shareholder returns to continue.
Firstly, Japan’s payout ratios may be low, but they have improved from the 20-25% range up to the30-35% range over the last decade. Secondly, and perhaps more importantly, there is reason tobelieve this improving trend may accelerate going forward due to the trends in ownership of themarket. Vocal investors who are looking to actively engage with companies, represented in Chart 6
by foreign investors and investment trusts, have increased their market share to approximately 40%,
while silent, cross-shareholders represented by business corporations and financial institutions(banks) have fallen significantly to also reach approximately 40% in total. We believe we are at atipping point where the effectiveness of engagement by investors may increase and help accelerate
the improvements in payout ratios and drive the continued rise in shareholder returns.
Nomura Asset Management | Rediscovering JapanPage 3

TSE Pressure
In addition to increased pressure from shareholders, the Tokyo Stock Exchange (TSE) recently
announced aims to change the thought process of management with regard to cost of capitalconsiderations, requiring companies trading below book to disclose business plans for how theymight achieve a return on invested capital that exceeds their cost of capital in the future. The ultimate
goals of the TSE are:1.

For Japanese management to improve their awareness of the cost of capital, and2.

For listed companies to function as publicly traded companies, by providing a riskpremium.

While one-off responses to raise ROEs and by extension PBRs aren’t the TSE’s main objective, we
are also encouraged by the number of companies that responded immediately in the form of dividend
hikes or share buybacks, which has gotten shareholder returns off to a strong start in FY2023.
Again, this story of improving governance and shareholder returns has been repeated many times
over the last decade, to a point where investors likely became bored. However, these changes arefundamental and game changing over the long term, and Warren Buffett’s recent comments make itseem that these improvements only required a new spot light to increase awareness, shift thesentiment and allow investors to rediscover Japan.
One of Buffett’s tenants has been to avoid investing in ABCs; or companies that are arrogant,bureaucratic, and complacent. Whether Japanese companies are arrogant may be in the eye of thebeholder, but Japan has historically been very bureaucratic and complacent. And yet, despite beinga market full of ABC companies in the past, if Buffett can see Japanese companies are changing
enough to invest in, perhaps this time really is different.

Nomura Asset Management | Rediscovering Japan

Page 4DISCLAIMER
This report was prepared by Nomura Asset Management Co., Ltd. (“Nomura Asset Management” or “NAM”) for
information purposes only. Although this report is based upon sources we believe to be reliable, we do not guarantee its
accuracy or completeness. Unless otherwise stated, all statements, figures, graphs and other information included in thisreport are as of the date of this report and are subject to change without notice. The contents of this report are notintended in any way to indicate or guarantee future investment results. Further, this report is not intended as a solicitation
or recommendation with respect to the purchase or sale of any particular investment. This report may not be copied, redistributed or reproduced in whole or in part without the prior written approval of Nomura Asset Management Co., Ltd.
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