A Recap of the Japanese Market in 2022

Watch Hennessy Japan Fund Portfolio Manager Masa Takeda provide a recap of the Japanese markets in 2022, including areas of the market that performed well and areas that underperformed.

March 2023
  • Masakazu Takeda
    Masakazu Takeda, CFA, CMA
    Portfolio Manager

Beau Barnett

Hi, everyone. My name is Beau Barnett, and I'm the Sales Director for Hennessy Funds. We appreciate you taking the time out of your busy schedules today to view a brief, but informative update from Masa Takeda, the lead Portfolio Manager of the Hennessy Japan Fund.

On this video, Masa is going to recap some of the key events that occurred in the Japanese economy and markets in 2022. With that, we look forward to speaking with you about the opportunity in Japan. And thanks again for viewing the video. 

Would you please provide a market review of 2022?

Masa Takeda

The Japanese market, the TOPIX Index, which is basically the S&P 500 of Japan, was down for the calendar year. Now if you look at the subindices—TOPIX Large Growth, TOPIX Large Value and then TOPIX Small Growth and TOPIX Small Value—the TOPIX Large Growth suffered the most during the year and that is attributed to the so-called market rotation from growth to value on the back of rising yields, which started in the last few years.

Now, some people believe that interest rates in Japan have barely moved. However, about 60% of market participants in Japan are foreign investors. Particularly for large cap names, foreign investors are the most active players and therefore it's the interest rates in their home markets that matter the most, in my opinion. In the U.S., due to sharp rise in interest rates, it's reasonable to see Japanese large cap growth names suffering in this market rotation, the most. Unfortunately, our Fund was also caught in this vicious trend and the Fund return was down quite significantly last year.

Although we do believe that our underlying investments, the businesses will continue to remain sound, and their durable competitive advantages will allow them to grow at a faster than average pace in years to come. So our investment style will largely remain unchanged. 

What performed best 2022?

Now, in terms of other sort of indices, large cap value performed the best in 2022. And that index was largely led by sectors such as banks and insurance companies. Though the sectors that have been perennially regarded as boring, low growth, mature industries, they finally showed strong performance thanks to the rising interest rates around the world. 

To summarize, it was the year of significant market rotation from growth to value, just like in other major markets around the world.

In terms of laggards, electrical appliances performed the worst followed by precision instruments. Those are typically high-tech growth-oriented names. And therefore in the current environment, those sectors, even though the earnings trend remained, still quite resilient, the valuation suffered from contraction of multiples. And so those two sectors were the main laggards for the year. And so that pretty much sums up the market trend for 2022. 

In terms of the market trends other than the differences in performance between growth and value, we also noticed that the globally oriented companies suffered more than domestically oriented companies in Japan last year. And that's because of the perception that the U.S. and Europe are now entering the recessionary phase.

While Japan, thanks to the belated reopening of the economy plus the expected increasing number of inbound tourists relative to the other regions, Japan was perceived as a stable economy and therefore small cap value stocks, which are typically domestic oriented businesses, attracted the most buying interest in 2022.