Last week, Nicola Takada Wood, head of Japan at (AJOT), said the tariffs on Japan will most likely be felt by Japan’s export-orientated large-cap equities.

Consequently, It's time for an adjustment.

“It is best to be less focused on those firms. Eighty per cent of the firms we invest in are domestically orientated and less exposed to tariffs,” she told this news service in an interview.

UK-domiciled AJOT aims to achieve capital growth by investing in small-cap Japanese equities which Takada Wood said are still cheap and undervalued. It is a "top performer" across Japan-focused open ended investment companies, significantly outperforming the index over a one, three and five-year period.

also estimates that the reciprocal tariffs will dent growth in Japanese real exports (goods and services) and real GDP growth in 2025. Nomura thinks that the Bank of Japan (BoJ) will find it more difficult to implement an early hike in interest rates, it still expects the next rate hike to take place in July 2025 and January 2026.

Japan rising
Since last summer, Japan has started to register positive real wage growth alongside inflation driven by domestic demand. This favourable wage-inflation dynamic supports the BoJ potential for further rate hikes this year. Takada Wood, and Kazunaga Saso, portfolio manager at , also think rates will rise again slightly, with a limited impact on stocks, after the last hike in January.  

“Tariffs are a force to be reckoned but with Japan’s underlying economy and corporate governance reform, there is a lot of positive momentum,” Takada Wood said. The reciprocal 24 per cent tariff on Japanese exports comes on top of the 25 per cent levy on its auto exports, which Saso is underweight in. The US is Japan's largest destination for automotive exports.

AJOT’s investment philosophy, which has focused on identifying undervalued, under-researched and overcapitalised companies, has engaged with management to correct these inefficiencies. The improvement in corporate governance has also been a huge positive for Japan. Takada Wood believes that there is still some way to go on this and offering solutions to improve it will be effective.

AVI has been investing in Japan for over 40 years as part of its global approach, but it was the realisation back in 2016 that Japan was going through the beginnings of a shift in corporate culture that inspired AVI to launch a Japan-dedicated strategy, AVI Japan Opportunity Trust (AJOT), in 2018.

In 2024, AJOT’s net asset value (NAV) rose by +20.9 per cent (in pound sterling), significantly outpacing the benchmark, which returned +6.2 per cent. Norman Crighton, chairman of AJOT, is also confident in the potential for further outperformance, delivering attractive returns for investors.

“The combination of rising pressure from regulators and activists in 2024 presents a compelling opportunity to unlock substantial value in small to mid-cap Japanese companies in 2025 and beyond,” Joe Bauernfreund, investment manager of AJOT, added.

AJOT’s NAV increased by +5.1 per cent (in pound sterling) in February, while the benchmark returned 1.8 per cent (in pound sterling).

Holdings
Top 10 sectors include consumer discretionary, IT, communication services, healthcare, real estate and consumer staples: IT firm Beenos, apparel manufacturer TSI Holdings, textile manufacturer Kurabo Industries, Eiken Chemical, a manufacturer of clinical diagnostics, IT services firm Tecnos Japan and Sharingtechnology.

The two largest contributors to performance in February were IT services company Tecnos Japan (+38 per cent share price), and Sharingtechnology (+14 per cent), which operates one of the largest life service matching platforms in Japan, connecting a variety of user needs arising from ever diversifying lifestyles, with high-quality services. Meanwhile, Broadmedia (-11 per cent), which is mainly engaged in online education and IT service businesses, was the most notable detractor, as investors’ confidence in its full-year guidance waned.

AJOT has also recently proposed to merge with Fidelity Japan Trust (FJV), aiming to create a market-leading Japanese investment trust. The former made this proposal public, ahead of the FJV continutation vote in May.