Japan – A Contrarian Bet?

Is there still a case for investing in Japan? Since mid-2024, foreign investors have sold off all the Japanese equities they bought during the post-COVID rally as the market has been weighed down by a stronger yen, tariff-related uncertainty, and Japan’s trade-exposed, cyclical economy.

Japanese equities finished April little changed, belying the considerable market turbulence seen globally during the month. On Liberation Day, a 25% tariff on cars and 24% on all other goods exported to the US were proposed for Japan. The initial pain was felt by export-driven manufacturers, particularly in high-quality industries such as robotics and factory automation.

The proposed levies were harsher than expected, driving valuations of some of these blue-chip exporters to near 10-year lows. The nation’s two largest trading partners, China and the US, account for nearly 25% of its foreign shipments. Japan is now trying to walk the tightrope between these economic heavyweights while avoiding the crossfire of tariffs and countermeasures.

Reflation trade on hold

The domestic reflation trade is also now effectively on hold as last week’s Bank of Japan (BoJ) press conference confirmed. The BoJ slashed its growth forecast for 2025 from 1.1% to 0.5% (after it barely grew last year) and expects inflation to be sluggish given the gloomy trade outlook.

Is it all doom and gloom though? Here’s a bright spot: contrarian pockets within Japan’s market may already have priced in much of this uncertainty and certain sectors that are home to some excellent companies may now be deeply undervalued.

Contrarian opportunities

Value has led Japanese markets since 2020, with bank stocks quadrupling from COVID lows. But that trade looks increasingly crowded.

Instead, it’s worth turning attention to Japan’s blue-chip exporters. These are businesses involved in areas of long-term excellence for Japan, such as robotics and factory automation. Historically regarded as Growth names, these stocks are now trading close to 10-year low valuation levels.

These exporters have strong balance sheets and dominant market positions. Crises often provide contrarian opportunity; this may well be just that.

Autos are another contrarian play. The sector has lagged significantly compared to banks, bogged down by competition in China, electrification challenges, and yen strength.

Figure 1. Are autos the new banks?

Source: Bloomberg as at 1 May 2025. TOPIX Banks Index divided by TOPIX Transport Equipment Index. Data rebased to 100 and shown from 1 May 2010 (to show a medium-term horizon over the last 15 years) to 1 May 2025. 

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Tariffs added further uncertainty, driving valuations to historic lows. Today, some smaller original equipment manufacturers (OEMs) are valued at close to zero on an enterprise value (EV) basis, which is a situation reminiscent of Japan’s banking sector four years ago. 

Corporate governance remains a long-term play

Japan’s corporate governance reform remains a story of long-term structural improvement for the nation. Since the Tokyo Stock Exchange announced its initiative in 2022, activism has soared and share buybacks as a percentage of market cap have hit all-time highs. 

Management teams are acutely aware of the importance of shareholders, and there is no going back from this mindset. However, significant change remains stock-specific and gradual. 

Parting thoughts

Japan’s equity market recovered well in the closing weeks of April. That said, the market remains narrow and this recovery has so far been led by previous winners. There is, however, a growing contrarian case for blue-chip exporters and autos, where uncertainty remains high, but valuations approach historic lows and the corporate governance reforms continue to reshape the investment landscape. 

Uncertainty is always underpriced; and the sectors facing the most extreme uncertainty may be offer the biggest opportunity. 

All data sourced from Bloomberg unless otherwise stated.

With contributions from Emily Badger, a Portfolio Manager at Man Group.