As the relative performance chart shows, Japanese equities have had many false starts and the late 2012 to early 2013 period under the Abenomics introduction was the latest period of excitement. The question is now whether Japanese equities could turn the tide and enjoy the love of investors.
Japanese equities are historically cheap
The MSCI Japan has almost recouped its lost earnings per share (EPS) over the past years since it peaked out in Q1 2018. In Q2 2021, EPS was almost back to the peak and we expect Q3 to show a new all-time for EPS, and this is also the main reason why Nikkei 225 futures have almost doubled from the lows in 2020.
While EPS has grown 14.7% annualized since 2011 the global investor has not been impressed pushing the valuation of Japanese equities lower. Today, the MSCI Japan Index is valued at 9.1x on EV/EBITDA compared to 15.1x for the MSCI World. This spread is a staggering 40.1% discount, a record low since 1995, showing that investors have not been this pessimistic on Japanese equities in almost three decades. How can investors be so pessimistic?