November 28, 2022 12:00 AM

Graphic: Japan outperforms the region

While Japan’s equity market has had a negative return this year, it still outperformed other Asian markets. Additionally, most separate account composites devoted to investing in that country’s stocks have topped the passive MSCI Japan index over various periods, according to data provided by Morningstar Inc. But with analysts expecting sluggish near-term sales growth for the Japan index’s companies, investing in the country’s equities remains challenging.

Tops in Asia: The MSCI Japan index’s -18.2% return through Nov. 17 bested the MSCI China and MSCI AC Asia ex-Japan indexes, which lost 28.7% and 22%, respectively. The Japanese index has outperformed China and Asia excluding Japan over longer periods, too.

Index returns

Valuation still lags: While Japan’s equity valuation has become more favorable this year, with its price-to-earnings ratio contracting to 12.4 from 13.9 at the end of 2021, other equity markets have seen their P/E ratios drop by more.

Price-to-earnings ratios

Sluggish sales: For the past several quarters, Japanese companies have had slower sales growth than their counterparts in the U.S. and Asia. Japanese firms’ third-quarter sales grew by 0.5%, but analysts expect year-over-year sales declines for at least the next couple of quarters, albeit less than in the rest of Asia.

Sales growth by index constituents

Going active: The passive MSCI Japan index has been outperformed by many separate account composites. While this year has been challenging, 12 out of 20 composites topped the MSCI Japan index’s -26.4% return.

Separate accounts vs. the MSCI Japan index**