Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. 

The start of the Tokyo Olympics promises to be one of the stranger games in modern history. Empty stadiums will make an appropriate soundtrack for a tournament whose build-up has been overshadowed by Covid, controversy and calls for its curtailment.  

Japan’s investment outlook has often been similarly unpredictable. Investors have long found this a tough nut to crack, put off by the idiosyncrasies of its markets and a long-standing case of economic stagnation - a combination of high inflation and low growth.  

But, for discerning stock pickers, there are investment opportunities to be unearthed here too. 

Last out of the blocks 

Since its 1991 asset price bubble, Japan’s economy has found itself in a rut. Only this year did its benchmark TOPIX index return to its pre-crash heights, 30 years later. 

As well as entrenched difficulties - stagflation being one - which have curtailed growth for decades, Japan is also suffering from a slow vaccination rollout which has seen the country’s economy lag other major economies through 2021. An economic contraction over the first quarter is likely to be followed in the second, resulting in what’s known as a technical recession.   

You’d hope a successful Tokyo Olympics would deliver an economic boost, but it’s long been suspected that host cities lose more money than they gain. There’s little doubt that a lack of spectators will cost Japan dear, while negative publicity in the run-up may even harm the usual Olympic ‘legacy effects’ of increased tourism and improved infrastructure.  

The tortoise and the hare 

What Japan does have is a low starting base. While the US, UK and, increasingly, Europe have made impressive strides in their vaccination programmes, subsequent growth in these regions looks like it may be beginning to stall.

Japan’s rollout has been sluggish in comparison - in part the result of a historically high bar set for drug approvals - but over recent months vaccinations levels have started to rise exponentially.  

Around 35% of the population has now received its first shot, with approximately 50% expected to be vaccinated by the end of August.


As elsewhere, a successful vaccination programme should feed into an economic rebound, with Japan’s relatively cyclical market - that is, one whose health tends to mirror that of the economy - particularly well suited to an uptick in domestic services. As a large exporter, manufacturing is already doing well thanks to a pickup in global demand, while supply constraints have put upward pressure on prices.

Japan’s other big selling point is its perennially cheap. On the basis of forecast earnings over the next 12 months, the Japanese market is significantly cheaper than both the US and European shares. The mismatch between prospects and prices in the region is striking.

Expert eyes

There are reasons to be hopeful as we move into the second half of 2021, but Japan has experienced false dawns before.

Investing in Japan can be challenging and this is where an expert fund manager can help. Our Select 50 list of fund recommendations features three Japan funds - the value-focused Man GLG Japan CoreAlpha fund, the growth-focussed Lindsell Train Japanese Equity fund, and the growth-leaning Baillie Gifford Japanese fund. We recently wrote about each fund in more detail here.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. The Lindsell Train Japanese Equity Fund invest in a relatively small number of companies so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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