Japanese stocks got their latest seal of approval from Warren Buffett as the legendary investor added to his holdings in Japan’s five largest trading houses. Akin to conglomerates, these ‘sōgō shōsha’ trade in a wide range of products and materials.

Buffett has been rewarded for his faith in Japan’s stock market, even if he says these investments are for the long-term and not just to make a quick buck.

The country’s flagship Nikkei 225 index reached a three-decade high on 16 June as the Bank of Japan persisted with its loose policy setting – running counter to the approach taken by other central banks. There has subsequently been some profit taking but the Nikkei still remains among the best performing indices worldwide so far in 2023.

M&G Investments’ Fabiana Fedeli says: ‘Within developed economies, Japan remains one of our favourite markets. We have found a number of companies that are improving operational leverage with a positive impact on earnings growth, alongside increasing shareholder returns via raising dividends and share buybacks, even without the support of the macroeconomic backdrop.

‘However, less well recognised in our view, alongside this culture of self-help and corporate reform, is the prospect of wage growth boosting consumption, providing a further potential tailwind for growth in the years ahead.’

Fedeli says that despite recent market strength, Japanese equities remain ‘underappreciated’ – though she does acknowledge currency as a factor for investors.

After all, a weak yen may be boosting Japanese exports and providing a tailwind for the country’s stock market but it is making it difficult for UK investors to fully participate in the rally.

In sterling terms, the Nikkei has delivered a return of just 12% compared with 27% in yen terms. So even the mainstream index trackers and exchange-traded funds tracking the index have underperformed, if priced in sterling.

The table shows the performance of various Japan-focused funds and investment trusts priced in sterling and only one has managed to beat the yen performance of the Nikkei 225, being Nippon Active Value Fund (NAVF) with a 28% return year-to-date.

A currency hedged tracker, like UBS MSCI Japan UCITS ETF (hedged to GBP) (UB02), which looks to balance out foreign exchange moves, would have allowed you to better participate in Japan’s rally. It has returned 26% year-to-date.

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