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Lost in translation

In September 2019 I found myself alone in Tokyo for a week or so on a work trip. I don’t speak any Japanese, but decided I still needed to eat, and accidentally ordered the most expensive meal of my entire life. I was the only person in the restaurant and they only had a Japanese menu, so I asked if they could just throw a few things on a teppanyaki grill and honestly thought everything was okay until they handed me a bill for the equivalent of about £380.

The yen has fallen a lot since then. Looking back at the charts, it peaked around the time I was eating. Dinner tonight would be only about £260, not that I’m going back there obviously. It has fallen a further 16% in 2023. This means we have not had the full benefit of the rise in the Japanese equity market this year, but over the last decade sterling has fallen around 20% against a basket of currencies, which has been a consistent tailwind for overseas equities. We gave a bit back this year, but I think it is okay to choose your battles sometimes and an unhedged currency strategy is still very far ahead on a longer time horizon.

Would it surprise you if I said Japanese equities had higher earnings growth than the US since the financial crisis in 2008? It surprised me – it’s not even close either – 6.6% annually in the US vs 9.9% in Japan. That is to 2022 though, what about 2023? Surely the US ran away with it, the Magnificent 7 (copied from the Japanese, but I digress) are going to save us? Not so much. Current estimate is 6.7% in the US and 11.4% in Japan. Both with slightly better than average years in 2023 – another surprise. The difference is the US market valuation has re-rated higher in that time, while Japan has de-rated lower. When choosing our funds, we like to think valuation and earnings matter. With the 29% year to date rise in the equity market outpacing earnings growth, Japan has become more expensive now than at the start of the year, but I still make it a 25% discount to global equities.

Where has this earnings growth come from? Japan’s population peaked in 1994 and the economy has been famously stagnant for decades. An academic paper[i] came out last week which makes the case that with ageing populations becoming an issue across the Western world, GDP per working age adult is a better, more nuanced measure than just GDP or GDP per (total) capita.

If we take the data they provide from 1990-2019, which is closest to the period since the Japanese population peaked, Japan’s total GDP growth was 0.93% per year, vs 2.49% for the US and 0.84% per capita vs 1.52% for the US – the sort of differential you might expect. But if we look at GDP per working age adult, Japan is 1.44% vs 1.56% for the US. Still behind, but much closer and Japan’s working age population declined -0.51% in the period, while in the US it increased 0.91%. The pattern is similar across most of the rest of the G7. Except Italy, they have all performed quite similarly across GDP per working age adult, suggesting specifically working age population growth is the key differentiator. Since 2008 – the earnings growth period above, Japan’s GDP growth per working age adult is the fastest in the G7, which makes their corporate earnings power much less surprising.

What does working age population growth look like from 2020 to 2030? Of the top 10 global economies, the UN forecasts growth in only the US and Canada, India and Brazil. China falls sharply from +0.1% to -0.8%, Germany falls sharply from +0.2% to -1.1%, the UK falls from +0.4% to -0.1%, but that -0.1% is one of the better absolute numbers. Japan stays about the same and continues to fall -0.8% per year, but this assumes no one takes any action. We would expect labour numbers of all kinds to receive more attention in the coming years.

As well as Japanese equities still looking cheap on valuations, we might get some help from the yen next year as well. One of the Japanese equity managers we met recently is a British ex-pat living in Tokyo. He told us when he posts birthday cards back home, it is cheaper to post it from Tokyo to the UK than it is to post it within the UK. This isn’t an approved way of valuing currencies and I don’t think we’re supposed to be handing out advice here anyway, but a trip to Tokyo is cheaper than it has been for some time and simply sensational if you get the chance. Would recommend learning some Japanese.

[i] The Wealth of Working Nations – Jesus Fernandez-Villaverde, Gustavo Ventura, Wen Yao, November 19 2023

Robert Fullerton – Senior Research Analyst

All charts and data sourced from FactSet

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority ( with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of Robert Fullerton, Senior Research Analyst. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.

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