A spotlight on Japan

What you’ll learn:

• Recent developments in Japan.
• Considerations before investing in Japan.
• How you may like to invest.

2021 looks set to be an Olympic year for Japan. The postponed Tokyo 2020 Summer Olympics and Paralympics are now scheduled to take place in July this year, and while spectators from abroad will not be allowed at the games, all eyes will be on Japan. International investors should also be paying close attention to recent developments in Japan.

With investors increasingly scrutinising companies through Environmental, Social and Governance (ESG) driven investing, we look at ESG investing in Japan and whether the reality is somewhat different to what people might imagine from reading only the headlines.

Despite the lack of international crowds and social distancing protocols, the Olympics will still be the athletic spectacle that we are all familiar with, and it will certainly be given a unique twist by its hosts in Japan. International investors are, by now, familiar with government stimulus and central bank involvement in markets.

In Japan, this has also been given a unique twist. As the only central bank in the world to be directly buying shares, we ask what does the Bank of Japan’s (BOJ) latest involvement in the stock market mean for investors?

ESG – Spotlight on gender diversity

Discussions around diversity and inclusion will typically focus on the importance of social justice and fairness and equality in the labour market and society. There is a clear moral argument for greater equality in the workforce and the economic argument behind this also makes sense as a diverse workforce has the potential to improve the efficiency of the labour market and the wider economy. This is very much part of the Social “S” in ESG.

Research shows that Japanese companies do continue to lag international peers on gender diversity. The proportion of Japanese women in management positions is significantly lower than that in the US and UK¹and the gender pay gap in Japan is second from bottom, after South Korea, among the 37 OECD (Organisation for Economic Co-operation and Development) member countries².

Female labour force participation is just one part of a broader discussion on diversity and inclusion, and the Japanese government has implemented policies to address it. Under former Prime Minister Abe’s administration, the female employment rate has climbed to a level comparable to that of Europe and the US.

It’s also an issue for individual companies to address and under the amended Act on Promotion of Women's Participation and Advancement in the Workplace in 2020, more than 17,000 companies have published action plans for female participation and advancement³. This combination of government and private efforts is encouraging and will be essential in driving meaningful change in the future.

Environmental, social, and governance considerations have risen up the corporate agenda in Japan and governance in Japan has also changed significantly. Japan’s Corporate Governance code, a principles-based comply-or-explain approach first introduced in 2015, has transformed the corporate landscape.

Many of the fund managers who invest in Japanese shares that we speak to have highlighted that having principles (as opposed to rules) to follow has encouraged dialogue between companies and investors, and allowed for more constructive interaction. This kind of interaction should help reduce the potential for simple box-ticking and help bring about more meaningful and lasting change for all stakeholders in the years to come.

The new Tokyo whale

The BOJ has been buying the shares of Japanese companies via purchases of index tracking Exchange Traded Funds (ETFs) for a decade. The sheer scale of its massive purchase programme mean the BOJ’s total ETF holdings hit ¥47tn (£305bn) earlier this year and it became the largest owner of Japanese shares in early December last year, surpassing Japan’s giant Government Pension Investment Fund⁴.

There are now two whales (investors with deep pockets who can move the market by buying or selling in large volumes) in the Tokyo stock market and share investors need to pay close attention when any change in policy is announced.

What does all this mean for investors?

The presence of the central bank and an improving background for ESG factors will continue to be unique features of the Japanese share market going forward this year and beyond. While it seems that the BOJ will continue to purchase shares for the time-being, what they intend to do with their massive ETF holdings in the longer term is unclear.

The reality is that, at some stage in the not too distant future, the largest single investor in the Tokyo stock market will likely be looking to sell some of their positions in these passive products.

Active managers with portfolios that look far less like these indices will potentially be better placed to take advantage of the opportunities that this will present. Those managers who are also at the forefront of engaging directly with the companies in which they invest on ESG-related issues can also help drive the positive changes that are on the horizon.

Where to invest

If you are looking for a long-term investment in an actively managed fund, you may like to consider the Man GLG Japan Core Alpha Fund on the Barclays Funds List. We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio.

To help you we’ve created our Funds List– it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s usually a mix of investment focus and investment approaches to choose from. So why not take a look at our selection? Find out more information on these Funds.

To help with diversifying your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ. Past performance of the fund and its manager are not a reliable indicator of their future performance.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Read the Assessment of Value report [PDF, 3.2MB] for funds run by Barclays.