Japan Value – An Island of Potential in a Sea of Expensive Assets

GMO

Drew Edwards, Rick Friedman

Research

4 Pages

GMO examines the opportunity set in Japanese value equities, arguing that persistent underperformance and corporate inefficiencies have created a deep pool of mispriced assets. The paper highlights how low profitability and excess cash have weighed on valuations, while suggesting that even modest governance improvements could unlock significant upside, with Japan trading at a meaningful discount to global peers.

Key Takeaways

Valuation Discount Deep: Japanese equities trade at roughly 1.3x book value versus ~2.5x for U.S. markets, reflecting a persistent valuation gap.
Cash Levels Elevated: Japanese companies hold cash equal to ~50% of GDP, far exceeding levels seen in most developed markets.
Return Improvement Potential: Raising ROE from ~8% to 12% could drive substantial re-rating across Japanese value stocks over time.
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