The Japanese stock market is cheap, and getting cheaper, but investment trust managers say resilient corporate balance sheets, a lack of inflation pressure, and expansionary monetary pressure set the region apart from other faltering developed economies.

While Japanese companies suffered much the same fate as other global markets when Russia invaded Ukraine, they also had to deal with a rapid weakening in the yen against both the US dollar and sterling, pushing import prices higher and heaping more pressure on stocks.

The stresses of this year have been reflected in recent results from Japan-focused investment companies. Half-year results from the £187m CC Japan Income & Growth (CCJI ) revealed the net asset value (NAV) of the trust dipped 0.7% in the six months to 30 April, although this includes the payment of a second interim dividend of 3.35p – a 4.7% increase in the dividend from the previous year despite the sluggish performance of Japanese markets.

Shares in the 3.5%-yielder have slid 8% this year to an 11% discount. Longer term, shareholders have had a five-year total return of 12.8%, below the TSE First Section gain of 15.2%.

Full-year results for the £174m JPMorgan Japan Small Cap Growth & Income (JSGI ) trust revealed the impact of the geopolitical turmoil experienced this year. While it outperformed its MSCI Japan Small Cap benchmark in the first half of the year, for the entire 12 months to 31 March the NAV tumbled 24.6%. On a 9% discount, the shares yield a high 6.5% but have generated a zero total return over five years, underperforming the 5.2% from the Topix Small Cap index.

Manager Miyako Urabe, who only took charge of the closed-end fund in January after the departure of Eiji Saito who left to pursue a law degree, said the result was ‘disappointing’ and the result of ‘unprecedented’ geopolitical tensions that exacerbated existing energy and commodity price pressures, pushing inflation higher and forcing central banks to raise rates.

She said despite inflation remaining low in Japan and the Bank of Japan (BoJ) maintaining ‘stimulatory monetary policy’, Japanese equities were not immune and the ‘widening interest rate differentials saw the Japanese yen weaken against the US dollar and sterling’ providing another hurdle.

While these factors may have dented performance in the short-term, Urabe is expecting them to provide a positive tailwind for Japanese stocks over the longer term, noting the ‘general absence of domestic price and wage pressures’ and a lack of reliance on Russian oil and gas.

‘While the weaker yen will put some upwards pressure on import prices, it will enhance the competitiveness of Japanese exports,’ she said.

Richard Aston, manager of CCJI, said the fact the yen fell from ¥115 against the dollar at the beginning of March to over ¥133 was ‘particularly significant’.

‘This 15% decline presents both challenges and opportunities for a country which is reliant on international trade,’ he said.

‘The current situation has developed as a result of notably different inflationary dynamics and monetary policy in Japan compared to other developed regions. These factors will influence the path of the post-pandemic recovery of the Japanese economy.’

Regardless of the overhanging uncertainties, Urabe said Japanese companies are well-positioned for a slowing in the global economies as they ‘typically have large cash positions and stronger balance sheets than their peers in other countries’.

The Japanese economy can also benefit from structural trends for digitalisation and the fact its ‘entrepreneurial companies are at the forefront of such innovation’.

While tech stocks have taken the brunt of the sell-off as rising inflation and interest rates discounted the value of their future growth, Urabe has added Rakus to her portfolio.

Rakus is a software company providing business services such as digital invoicing, expense management, and email management and distribution.

‘The company has a mix of mature, very profitable and cash generative services, as well as a suite of new product offerings,’ she said.

‘This portfolio approach provides Rakus with earnings stability, as well as good growth potential.’

The two major additions to Aston’s portfolio – Toyota Motor and Hitachi – also play to the technology theme. He said the former is an auto leader and can ‘reap the rewards of years of investment in advanced technologies’.

Aston said Hitachi had ‘restructured and refocused its sprawling and cumbersome business empire’ and had its focus on shareholder returns has ‘created a substantially more attractive investment proposition’.