While inflation and the Bank of Japan’s move into positive policy rates has created hesitations for some considering investments in the country, BlackRock’s May EMEA implementation guide put the optimal Japanese equity allocation for an average EMEA portfolio at double its current exposure.
So far in 2024, EMEA-listed Japanese equity ETPs have attracted $1.7bn while US-listed Japanese equity ETPS have brought in $3.5bn. This puts inflows for this year already over half of the total invested in 2023.
“This suggests that investors are starting to warm to Japan, but we think there’s further to go. Our analysis shows that the average EMEA multi-asset portfolio is currently significantly underweight Japanese equities, and that increasing allocations to the region can result in an increase in diversification properties,” the report stated.
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Japan also provides diversification relative to other markets, BlackRock argued, with a sub-50% correlation in most cases. Correlation with the US was 54%, UK; 49%, emerging markets; 48% and global ; 59%. The only other market BlackRock pointed out with a similarly uncorrelated market was China.
“Not only does an increased allocation to Japanese equities offer an opportunity to benefit from the diversification properties, it could also improve the overall portfolio’s risk-return profile,” BlackRock’s report stated.
“Indeed, compared to European equities, for example – which are a core exposure in EMEA portfolios – Japanese equities have delivered greater risk-adjusted returns over the past one and 10 years.”
Based on BlackRock’s projections, it said the benefits call for a doubling of the allocations to Japanese equities held in the average EMEA portfolio.
BlackRock recognised some hesitation from investors has come from ‘lagging’ returns in Japan in the past, but believes the reforms over past years have altered the pattern.
“Increased focus on shareholder value is not a short-term trend, in our view: it represents the culmination of a decade of corporate reform driven by the Tokyo Stock Exchange,” the report stated.
“We think progress on shareholder reforms justifies a higher valuation premium for Japanese equities.”
