Ask the Manager: Kei Okamura Breaks Down Japan’s Investment Case

In this edition of Ask the Manager, we caught up with Kei Okamura, Portfolio Manager, NB Japan Equity ETF (

) at Neuberger Berman, to understand his perspective on Japan’s economic revival, the structural reforms shaping corporate governance, and the compelling investment opportunities emerging in the market.

You live and work in Japan, what is the sense you’re getting from the home market?

For the first time in over 30 years, we’re seeing strong signals that Japan is nearing the end of its deflationary “lost decades.” Inflation has stabilized above 2%, and wages are rising across not only large-cap companies but also small- and mid-sized enterprises.

This broad-based shift is pivotal for the Japanese economy. On the corporate front, companies are enhancing value by improving balance sheet efficiency, divesting underutilized assets, and reinvesting in growth. Regulatory reforms are also driving corporate governance improvements, encouraging foreign capital inflows.

These factors contributed to strong performance in Japanese equities in late 2023 and early 2024, and we anticipate further opportunities in the near to mid-term.

If you were a U.S. investor, why would you be looking at Japan right now?

While U.S. investors often exhibit home bias due to the strong track record of U.S. equities, diversification is critical. U.S. equity valuations are elevated, and cracks in earnings growth have emerged, prompting investors to explore opportunities abroad.

Japan offers compelling alpha opportunities, with under-researched, under-owned global companies benefiting from the same megatrends as their Western peers but trading at significantly lower multiples. Furthermore, macroeconomic shifts, corporate governance enhancements, and regulatory reforms are driving a revaluation of Japanese equities.

When combined with attractive valuations, Japan presents a strong case for investment diversification.

Part of understanding Japan is the history lesson… Can you speak to some of the reforms that have shaped the current investing landscape in Japan?

Japan’s corporate governance reforms date back to the early 2010s under Prime Minister Shinzo Abe’s “three arrows” economic strategy. These reforms initially focused on improving boardroom effectiveness, addressing low board independence, and enhancing directors’ skillsets. Over time, the focus shifted to improving capital efficiency, addressing issues like underutilized assets and cross-shareholdings.

While reforms stalled in the late 2010s, renewed emphasis on governance and capital management in the early 2020s reignited global interest in Japanese equities. These efforts have driven significant re-ratings in the market, with companies increasingly prioritizing shareholder value creation.

One of your talking points is on engagement…. Tell us about that.

Corporate engagement involves constructive dialogue between shareholders, like Neuberger Berman, and corporate management. In Japan, this engagement is particularly impactful given the low representation of foreign investors in this segment of the market as many firms are under-researched and undervalued.

For example, roughly 70% of companies in the MSCI Japan Small Cap Index are covered by fewer than five analysts, with 15% having no coverage at all. By engaging on issues like capital management and governance, we help companies address issues weighing on their valuations and strengthen disclosure, which would help attract more long-term investors like Neuberger Berman.

This approach has historically generated significant value for our investors, with 10-20% of performance attributed to such engagement efforts.

Can you explain the fund's strategy and why its current sector allocation is structured as it is today?

Our strategy focuses on “quality at a reasonable price.” We seek companies with strong fundamentals, such as pricing power, technology, or brand strength, which are attractively valued for mid- to long-term growth. Currently, we are overweight in industrials and consumer discretionary sectors, which include globally competitive companies with strong market share and pricing power.

Conversely, we avoid heavily regulated sectors like utilities and energy, as they face challenges like government intervention and commodity price volatility that can limit earnings visibility, which we see as crucial for mid- to long-term business and capital management planning. But this is a benchmark agnostic strategy and this approach allows us to focus on fundamentals and identify opportunities driven by sustainable growth trends.

How is the portfolio positioned to handle volatility amid tariffs, trade wars, and President Trump’s policy moves?

While Japan is not immune to market volatility stemming from U.S. trade policies, its strategic positioning in the Asia-Pacific region and strong ties with the U.S. and Europe provide resilience.

Trade tensions have driven currency fluctuations, particularly the yen, but we think the currency will gradually appreciate over the mid-term which would benefit domestically focused companies by reducing imported cost inflation.

We expect 2025 to be pivotal for domestic companies, as rising wages and increasing consumer demand should bolster margins.

Exporters, too, are adapting by localizing production, reducing the impact of tariffs and currency shifts. This balanced positioning supports the portfolio through both domestic and external challenges.

Can you list a few headwinds and tailwinds for the Japan investment opportunity?

A key headwind is the Bank of Japan’s rate hiking cycle, which contrasts with easing policies in other regions.

However, Japan’s unique circumstances, including decades of monetary easing, mean rate hikes are likely to remain gradual and capped at modest levels (1-2%).

Tailwinds include stable inflation, rising wages, and corporate reforms addressing capital inefficiencies, which are driving revaluation opportunities.

Exporters have adapted to trade challenges by localizing production, while domestic-focused companies benefit from stronger consumer demand. Together, these factors position Japan favorably amid global uncertainty.

Fun question: Can you tell us more about the largest names in the fund today and why they sit at the top?

One of our top holdings is a global leader in internal combustion engine spark plugs, controlling 70% of the market. While EV adoption is growing, we believe internal combustion engine vehicles will remain relevant over the next few years, supporting the company’s growth. The firm has leveraged industry consolidation to strengthen its market position and pricing power.

Additionally, it is addressing capital inefficiencies and enhancing shareholder returns through constructive dialogue with investors. These strong fundamentals, coupled with attractive valuations, make it a top holding in our portfolio.

Fun question: Tell us about one of your smallest positions in the portfolio that you're particularly excited about.

A smaller position we’re excited about is a high-end department store operator in Japan. The company has successfully revitalized its stores, targeting younger demographics while attracting affluent tourists. Inbound tourism, supported by a weaker yen, has driven strong growth, alongside rising domestic consumption from younger Japanese consumers experiencing wage increases.

Additionally, events like the upcoming Osaka World Expo should further boost footfall and sales. With ongoing improvements in capital management and governance, we see significant mid- to long-term potential for this position.