🎧 Why Japanese Equities Are Booming | Masaki Taketsume, Schroder Japan Trust

🎧 Why Japanese Equities Are Booming | Masaki Taketsume, Schroder Japan Trust

Welcome back to Investing Markets and Money with 
the Armchair Trader. And this week we’re talking about Japanese equities and uh more generally the 
Japanese economy. Uh joining us on the podcast today. Um we’re very privileged to uh be be 
talking to Masaki Taketsume who is joining us from Schroders and he is the portfolio manager for the 
Schroders Japan Trust. Welcome to the show Masaki. Hi. Yeah, thank you for having me. Uh, it’s really 
good to be talking to somebody who’s dealing much more uh, closely with these markets than I am. 
I mean, certainly our team was very bullish um, about Japan over the last 12 months and 
certainly Japanese markets have been rewarding investors. Um, but I thought just to start 
off with before we get into the nitty-gritty, can you give us a a quick overview of u 
Schroders Japan and and what it sets out to achieve from a investment perspective? Yep. So 
Sha Japan trust uh overall aims to outperform the uh Japanese equity market and the basic 
approach is bottom up stock selection and uh as a result of the bottom up stock selection uh 
overall portfolio has some bias towards value and mid to small cap. So our fund is characterised as 
the uh performance driven by the alpha generation from the stock selection and some style bias 
towards the value and the mid to small cap. So that’s overview of the Schroder Japan trust and 
when you when you say mid to small cap I mean how small do you go in terms of the market 
cap of the companies you can invest with? Yeah. Uh we generally define the large cap as 
a top 100 stock market cap capitalisation stock and the next 400 as a midcap and everything 
below that is a small cap. Uh we don’t have any limitation in the market cap uh perspective 
but uh we are always mindful about the liquidity of the toing volume. So, so in other words, as 
long as the liquidity is okay enough for us, uh we have no limitation in how small we can go. 
Yeah. So, this is very much uh a stock picker strategy basically picking the picking the names 
that you think will perform in the future. Yes, it is definitely. Yeah. And the Japanese economy 
was doing really well last year. Um partly thanks to the very cheap yen. I was in Japan um in 
October. I couldn’t believe how cheap it was in fact and I’ve been telling everyone they need 
to go and visit while it’s still as cheap as it is. Um do you think that’s going to continue or or 
do you think we’re going to see some changes in in in the yen and in Japanese interest rates? Yeah. 
So in terms of the outlook on currency which is always difficult one but uh given the fact that 
we think that the inflation is coming back in Japan so that allows the bank of Bank of Japan to 
continue to normalise the monetary policy uh which means that continue to raise their policy rate. 
So that suggests that we are seeing that narrowing difference in interest rate between Japan and 
mainly for the US. So that implies that there may be some more chance to see that the appreciation 
of the yen uh compared to the far the depreciation of the yen. How do you think that will impact uh 
Japanese stocks if the yen becomes more expensive? We believe that the sensitivity uh of the 
exchange rate movement on the Japanese equity market getting smaller and smaller. 
uh simply because Japan now has their own specific tailwind for the economy economic 
growth as well as the Japanese equity market uh performance uh which uh corporate governance 
improvement and uh as we talked uh coming back coming back to the inflationary environment. 
So with those two strong domestic forces uh exchange rate impact uh should be getting smaller 
for the Japanese equity market we believe. Do you think inflation in Japan has been a problem for 
Japanese companies in the last 18 months? Actually in a case of the Japanese company it going to work 
as a tailwind rather than the headwind because we we were in almost three decades of the deflation. 
Deflation means that the lack of the pricing power for the Japanese company in a domestic market. 
But uh under the inflationary environment, if your company has a pricing power, I mean with 
a strong uh market share or strong brand or strong business franchise, uh you can raise the price to 
further improve the profitability or accelerating the earnings growth. In that sense, inflation 
especially in a modest level of the inflation uh we are seeing right now is going to work 
actually tailwind for the Japanese company rather than headwind. And one of the big stories here 
in the last 3 months in fact everywhere has been the uh Trump tariffs policy. Uh Japan obviously 
was on his famous list along with a lot of other countries um on liberation day. How’s that how’s 
that impacting Japan? Yes. So obviously tariff is a negative for the all the global economy but uh 
in a case of the Japan uh negative impact maybe not as significant as feared. So uh three point 
first uh export actually is not a big part of the Japanese economy. So Japan is actually the 
one of the lowest dependence on the export for the economic growth among the major developed 
countries. So that’s the first thing. Secondly, in terms of the export destination from Japan, uh 
US only represent 20% of the export from Japan. So Japanese export is more well diversified. And the 
last but not least, most of the goods exporting from Japan to US is a highly valued added item 
like a industrial robot uh which no US company is manufacturing. So in that sense uh they can 
offset some of the negative impact from the tariff by raising the price. So highly value added item 
export into US from Japan and the US is relatively small portion of the overall export from Japan and 
the export itself is a relatively small portion of the total GDP in Japan. So in that sense tariff 
obviously it’s a negative but may may be not as negative as perceived. So that’s our view. A long 
time ago um I used to cover Japanese stocks when I was working uh the financial times and at that 
time there was a very strong impression that a lot of Japanese companies were not so interested in 
the interests of shareholders and fund managers. Foreign fund managers used to complain about 
this. But today the Japanese government is pushing forward governance reforms and making 
trying to persuade uh companies to become more responsive to the interests of shareholders. Um 
how important do you think that is? Um and is that a good thing for investors now? Are you 
seeing the the benefits? Yes, definitely. So governance corporate governance improvement is 
the one of the most if not the most important uh positive driver for the Japanese equity market. 
Uh it’s going to structurally improve the return on equity as well as earnings outlook uh for 
the Japan. So as you correctly pointed out, Japanese company has been uh underutilized their 
balance sheet through accumulating the cash on the balance sheet. But because of the trend of 
the corporate governance improvement, uh more and more Japanese company is seriously debuting 
their uh balance sheet and better utilizing the uh balance sheet by decreasing the excess cash to 
the shareholder and or uh making the investment to enhance their profitability or growth prospect. So 
in that sense uh corporate governance improvement uh which has started in almost 10 years ago uh 
uh is working as a structural tail wind uh for the Japanese equity market we believe. And do you 
think Japanese companies are are you seeing actual realistic changes being made it made by companies? 
Are they becoming more responsive to you? Yes, it is. So we uh I am doing uh uh Japanese equity fund 
management. So more than more than two decades but uh he used to be uh governance improvement 
or shareholder shareholder remuneration uh wasn’t that any topic from the meeting with the 
management but for the last five or 10 years uh we are more we we we talked about the how you going 
to improve the ROE or how you going to better utilize the capital from the shareholder uh to 
improve the growth prospect or return equity. So that’s more and more uh topic of the discussion we 
have in uh with the corporate management. And just uh for your information for the last uh 10 
years actually average return on equity uh of the Japanese corporation got more than doubled 
uh from four to 5% to now uh close to the 10%. So that was partly driven by the corporate governance 
improvement. Wow that’s excellent. I mean that shows you what can be achieved. Um yeah, when I’m 
looking at the Japanese market myself, I see many um very great opportunities in the market. 
One, because it’s so large, it’s so diverse, but it seems that there are many companies 
that are very underresarched. They have very little publicly available information or the 
the brokers aren’t really following them. Does this create opportunities for you as a fund 
manager? Yes, it does. So as you pointed out uh Japan Japanese equity market more than 3,000 
company being listed and uh we have a very long tail tail of the meat to smoke up investment 
opportunity uh where the coverage is quite almost nothing. So by having the uh in-house 
resources based in Tokyo like our uh like our our fund uh we have a plenty of the opportunity 
to find out the mid to small cap company which actually has a very strong niche top franchise 
in the global market. Yeah. So you end up doing a lot of your own research rather than relying 
on any kind of third party information. Exactly. So that’s one of the advantage uh by having the 
local research resources based in Tokyo like us. And at the moment which sectors in the Japanese 
equity market look good to you right now? Yeah. So we are stock picker our approach is a bottom 
up stock selection. So we don’t necessarily take a top down view to bet on any sector but uh based 
on uh uh input from the our our analyst as well as uh economic condition. So basically we have a more 
positive view on the domestic economic outlook uh compared to the global economy. uh we tend to 
favor the domestic oriented sector like a services or retail or financial uh over the exporter right 
now. And why do you think active fund management is still important to get the best out of Japanese 
equities these days? Yeah. So even though we have a strong structural tailwind for the Japanese 
equity market uh one is a corporate governance improvement another one is inflation we have to 
pick the right one right company to benefit from that trend. So for example in the case of the 
inflation so it means that two thing first one is a increase in the cost pressure so that going 
to happen in any company have a business in Japan that’s a negative side but on the positive side if 
you have a strong business franchise high market share or high brand recognition you can raise the 
price more than your cost. So you have to pick the company which has a pricing power backed by the 
brand or market share to get benefit from the inflation in Japan. Here is a area that the stock 
picking becomes a critically important. So that’s uh that’s one of the illustration why individual 
stock picking is so important to uh generate a strong outperformance in Japanese equity market. 
Yeah. In terms of shareholder activism in Japan, we’re seeing some fund managers uh launching 
activist campaigns. A lot of these are not Japanese fund managers, but given that there is 
pressure from the government as well for these corporate governance reforms that we’ve already 
spoken about, do you think that um this kind of activism is going to become more widespread in 
the Japanese market? And also, is there more of a Japanese way to get these sort of results rather 
than the sort of traditional western way of doing it? Yes, for both. Uh yes for both question. 
So we do think that’s the activist campaign uh going to increase going forward uh simply 
because that’s the bequest from the activist uh getting more national or getting more closer 
to the uh that of the ordinary investor like us or more similar to the current uh Japanese comp 
Japanese Japanese company management is thinking of. So it used to be uh activist campaign is 
more like a confrontation against Japanese corporate management but now it’s more like a 
co-operation among the activist investor and the Japanese companies management. So in that 
sense uh we have a we we have a good chance to see that the positive result which satisfies 
everyone everyone ranging from the activist investor and the Japanese corporate management 
it is safe. So that’s a kind of the trend we are seeing a Japanese activist viewpoint and uh 
just for your information uh we are not doing the public campaign type of thing but uh we are 
doing so-called soft engagement uh with uh with a company we are investing in. Yeah. And when 
I’m doing my own research in the Japanese small and midcap market as well as some of the bigger 
companies, often we come across companies that are uh very diversified, but frequently they own 
different businesses and sub businesses that have nothing to do with the core business. So for 
example, we were looking at a Japanese hotel group that was also had a construction arm and then 
they had um a manga studio making uh cartoons as well. So from a fund manager’s perspective, 
do you see many of these strange alignments of different businesses under the same corporate 
structure and is that a uniquely Japanese thing? Okay. So in term of the diversified company 
in Japan, we tend to categorise them into the two type of the growth or two type of the group. 
First one is a yeah that kind of the diversified companies you just mentioned lots of businesses no 
synergy. So in that type of the company so because of the corporate governance improvement uh we are 
going to see the more of the deconsolidation uh of that diversified company spun out of the non-core 
business or those type of thing another type of the uh diversified company. So it’s some company 
has their same root for the diversified business which tends to find in a chemical or electronics 
company. So they have a one core key technology uh which tends to be the origin for their company 
and they are expanding the uh end of market by leveraging their core technology or core product. 
So maybe one of the example is a NIDEC uh so their origin is a motor. So they they have a exposure 
to the various business in uh car automotive or IT product or industrial machinery but uh all 
of those business are related to the motor which they have they have a origin. So there is 
a that type of the seemingly diversified company in Japan but it’s actually the one basic root of 
the businesses on that type of the company uh they can maintain the as long as they can maintain the 
core essential part of the root of the businesses uh we we are generally think okay to see the 
diversification because there is a strong synergy by leverageing their core technology. Yeah, 
understood. No, that’s very interesting. Um, and finally, I just wanted to end by asking you what 
your outlook is for the Japanese equity market for the next six months, really through to the end 
of the year. Yeah. So towards the end of the year uh obviously uh looking to the domestic side 
of the Japanese equity market uh inflation and the corporate governance improvement continue to 
progressing well so that’s supporting the uh share price performance of the Japanese equity market 
but uh looking externally what’s happening global economy especially for the US there’s a lot of the 
uncertainty So on that sense uh there could be tag of tug of war between the positive domestic force 
and the uncertainty from the external forces but overall considering the current variation level 
uh which demand within a historical range and uh still the discount against a major uh equity 
market Europe or US uh we have a generally uh positive view on the Japanese equity market 
outlook. Oh, very good. Well, thank you very much indeed for joining us this afternoon 
and giving us some very valuable insights into into the Japanese market. Masaki, we really 
appreciate it. Thank you. You’ve been listening to the Armchair Trader podcast. Make sure you 
visit our website www.thearmchairtrader.com for your daily dose of financial markets news 
and sign up to our free newsletter there.

Welcome back to Investing, Markets & Money with The Armchair Trader! This week, we deep-dive into the outlook for Japanese equities and the broader Japanese economy with Masaki Taketsume, Portfolio Manager of the Schroder Japan Trust.

Masaki shares:
✅ Why Japan is still a top pick for global investors
✅ How bottom-up stock selection is driving returns in small and mid-cap Japanese companies
✅ What inflation really means for Japanese corporates after decades of deflation
✅ Why the weak yen might not matter as much as you think
✅ How corporate governance reforms are transforming returns for shareholders
✅ Why active fund managers have a unique edge in Japan’s under-researched markets
✅ What sectors and themes are offering the most promise into year-end

He also discusses the rise of shareholder activism, the “Japanese way” of corporate change, and why some quirky conglomerates might be overdue for breakups.

📈 If you’re interested in undervalued markets, alpha-generating strategies, or want to understand Japan’s changing corporate landscape, this episode is packed with insight.

👉 Subscribe for more expert takes on global markets.
📬 Don’t forget to visit thearmchairtrader.com and sign up for our free daily newsletter.

#JapaneseEquities #InvestingPodcast #Schroders #FundManagement #Inflation #CorporateGovernance #ActiveInvesting #TheArmchairTrader

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00:00 Intro to the Schroder Japan Trust
01:45 Market cap of invested companies
02:37 The yen and Japanese interest rates
04:47 The effect of inflation on Japanese companies
05:57 Effect of international trade on Japan
08:00 Corporate governance and shareholder interests
11:25 Opportunities with under-researched companies
12:56 Which sectors are looking good?
13:46 Why is active fund management important with Japan equities?
15:17 Activist campaigns in Japan
17:27 Over-diversified business groups
20:24 Outlook for Japanese equities