UNRAVELING THE RECENTRISE OF JAPAN’S
FINANCIAL MARKETSThanks to recent reforms aimed at helping Japan to become a leading asset management center—promoted by both thepublic and private sectors—the country’s markets are beginning to show signs of promise. What appeal do these markets
hold, and what is their background, according to an expert in asset management who is active worldwide?
In late February 2024, Japan’s
stock market surpassed the record
set at the peak of the bubble
economy in 1989. Less than twoweeks later, the Nikkei 225 index
topped 40,000 for the first time,again grabbing global headlines.
The high recorded on the final
trading day of the 1980s was

the product of an inflated asset
bubble. However, according toDavid Semaya, executive chairmanof Sumitomo Mitsui Trust
Asset Management Co., Ltd.,the current strength in Japaneseequities is underpinned by robust
fundamentals, and there are firm
reasons to believe that the best is

yet to come.
Semaya pointed out that oneof the core factors influencing
the current optimism about
Japan’s markets is the mostfundamental of fundamentals:
well-run companies. Japan haspromoted corporate governancereforms since the establishmentof the Stewardship Code in 2014,
and the Kishida administration
is further encouraging thesereforms through its Policy Planfor Promoting Japan as a Leading
Asset Management Center. Stilla work in progress, the increased
Left: Interior of the Tokyo Stock Exchange. AFLO
Below: David Semaya, executive chairman ofSumitomo Mitsui Trust Asset Management, hasbeen working in asset management in Japan
since 1998.

focus on efficient use of capital andprofitability should have positive
influences. “I think we’re in a place
now where we have a good balance
between shareholder returns andstakeholder needs, demonstratinga very sustainable model,” Semaya
said.
Better corporate governance isjust one pillar of various initiatives
underway. In April 2023, thegovernment
announced
its
Action Program for Accelerating
Corporate Governance Reform,
which includes initiatives topromote dialogue with global
investors
throughfurther
expansion of information in the
English language. Moreover,
the Tokyo Stock Exchange andbusiness groups are cooperating topush for measures including moreaccessible markets and easier entry
for global players into the financial
sector. Also, special business zones
are planned to be establishedsoon, tailored specifically to asset
management businesses for whichadministrative procedures can becompleted solely in English.
Encouraging more talented fundmanagers to set up shop in Tokyo
should not only boost returns forJapanese investors, but also add
value across the domestic asset
management value chain throughthe experience gained by local
hires, according to Semaya. The
sector has enormous potential inJapan, in no small part due to theprospect of enticing some of thevast pool of household savings into
the country’s financial markets.
Tapping into that to make Japan aleading asset management centeris one of the aims of the current“We will rectify Japan’s unique business practices and resolve barriers to entry, and will also introduce
a new program to assist new entrants,” explained Prime Minister Kishida in September 2023 to leaders
at the Economic Club of New York.

reforms. At the end of June 2023,
total household assets stood at
2.1 quadrillion yen (around 14.3
trillion dollars). Approximately
half of that is currently held in bankdeposits, and even if a portion ofthat were to come into equities andother assets, it would further boost
markets and the financial industry
as a whole. The upgraded Nippon
Individual Savings Account(NISA) tax exemption programfor retail investors relaunched in
January is designed to do exactly
that.
Semaya pointed to anotherfactor in the Japanese economy’sfavor: the recent arrival of risingsalaries and healthy demand-pull
inflation after decades mostly
characterized by stagnation anda deflationary mindset that heldback economic activity. “Theincrease in wages was significant
overall on average last year. And
this year, my understanding is that
increases will also be significant inmost sectors,” said Semaya. Higherwages are linked to maintaining
healthy inflation, will stimulate
the economy, and can contributeto the virtuous cycle of growthand distribution that Prime
Minister Kishida vows to realize.
In his policy speech in January2024, he stated, “We aim to bringabout a virtuous cycle in whichhousehold finances are reoriented
towards investment and theincrease in corporate value leads togreater household income, giving
rise to further investment andconsumption.”
Semaya believes that this may be
one of those rare moments whennearly all the stars are aligned forJapan’s markets, something thatis not going unnoticed overseas.
“I get questions from investors
abroad who have not previously
followed Japan, such as: ‘What’s
the best way to do our research sothat we can potentially allocate
capital there?’ I think these arevery, very good signs. I haven’t
heard this in 30 years.”