Strategist View
Japanese equities are set to escape last place
Nomura Asset Management Co., Ltd. Published June 2, 2023

Hideyuki Ishiguro
Senior Strategist■ The Tokyo Stock Exchange (TSE) reported on Sunday thatin the fourth week of May foreign investors were net buyersof Japanese stocks for a ninth consecutive week. We
believe that recent reform by Japanese companies isleading to increased foreign purchases of Japanesestocks.

Figure 1. ROE (Return on Equity) andPBR (Price to Book Ratio) of stock indices in major countries(X)
4.5■ The buying and selling of Japanese stocks by foreign
investors generally tends to be linked to the ROE ofJapanese companies (Fig. 2). In recent years, foreign
investors have been reluctant to invest in Japaneseequities because their earning power has been lagging
compared to that of overseas stocks.

■ Recently though, in response to the TSE's call for reformcompanies have begun to make effective use of surplus
reserves, such as via share buybacks, and the TOPIX'sreal ROE has increased by more than 0.4% points from theend of the fiscal year in March to the most recent quarter,
indicating movement toward improving profitability. As theROE gap between Japanese stocks and those of otherdeveloped countries begins to narrow, foreign investors
have purchased more than 4 trillion yen (app. USD$29bn)
worth of Japanese stocks in the last 9 weeks (Fig. 2). Given
the large scope for improvement of ROE and a low level of
net transactions by foreign investors, there could be a
substantial upside potential for Japanese equities over themedium to long term.
*This commentary is based on personal views of the author and does not necessarily
represent Nomura Asset Management house view.

India

3.5

■ In terms of ROE (Return on Equity) and PBR (valuation ofshare prices in terms of net assets), Japanese stocks rank
among the lowest of the major economies (Fig. 1). The
chart indicates that low ROE is the cause of this low PBR.
However, with the TSE urging listed companies to takesteps to boost ROE and PBR, Japanese stocks are startingto make progress, with corporate leadership now heeding
this call to action.
Will ROE continue to improve?

USy = 0.3052x - 1.5721
R² = 0.7918

4.0Real PBRJapanese stocks are on the rise

3.02.5

CanadaChina
1.5FranceJapan
2.0UK

Germany

1.00.57891011121314151617

Real ROE18(%)

Period: As of June 1, 2023 Note: Japan: TOPIX, China: Shanghai Composite, Germany: DAX,
Canada: S&P Toronto Composite Index, France: CAC40, India: S&P/BSE SENSEX India Index,
UK: FTSE100, US: S&P500. The red line in the figure shows the relationship between the ROE
and PBR of each country's stock index as a linear regression (coefficient of determination =0.79)
Source: Nomura Asset Management based on Bloomberg data.

Figure 2. ROE Gap - Japanese vs Developed (4-week movingaverage) and accumulated foreign investor transactions(JPY, tn)(% point)-140ROE Gap
Japan vs. Developed-235-330-425-520-6

15-7

10-8

5

Foreign Investors Net Transactions(Cumulative) (RHS)

-90
12

13

14

15

16

17

18

19

20

21

2223(Yr)

Note: Period: (ROE difference between Japanese and developed country stocks) January 6,
2012 to June 1, 2023, weekly. Accumulated foreign investor net transactions: 1st week ofJanuary 2012 – 4th week of May 2023, weekly. ・Japanese stocks: TOPIX ・Developed country
stocks: MSCI World Index Source: Nomura Asset Management based on Bloomberg data.

Disclaimer
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