* Foreigners bought net 10.1 trillion yen of Japanese stocks
through early July
* Topix gauge up 1% since June 25 versus more than 8% drop
for Nikkei
* Tokyo exchange's next reform to tighten Topix liquidity
standards
By Junko Fujita
TOKYO, July 23 (Reuters) - Japan's deep bench of small- and
mid-cap stocks has been largely overlooked amid AI euphoria and
may stand to benefit as investors rotate into value shares.
The benchmark Nikkei gauge marked a record high close on
June 25, riding a tide of AI optimism that has boosted global
shares and as foreign investors boosted weightings in Japan.
But the Nikkei has slid 8% since then, and its heavy weighting
in tech has made it vulnerable to whipsaw swings and moves by
its South Korean counterpart, which is dominated by a few
AI-related names. The Topix index, which has more than 1,600
names to the Nikkei's 225, is up about 1% over the same period.
"Foreigners who do not know Japan well have grabbed
heavyweight, chip-related stocks as an entry to the market,"
said Hiroki Iura, chief fund manager at Resona Asset Management,
who manages the small-cap fund. "If they become more serious
about Japan, they will buy the broader Topix. As a result,
discounted small- and mid-caps will likely become more
attractive."
Japan's economy and stock market were moribund for decades, with
the Nikkei finally exceeding its bubble-era 1989 high in
February 2024. Part of the breakthrough for the market was a
governance push by the Tokyo exchange that pressured companies
to improve profitability and shareholder returns.
GOVERNANCE REFORMS
Those reforms convinced many foreign investors it was time
to buy. Their net purchases of stocks amounted to 10.1 trillion
yen ($61.95 billion) this year through the beginning of July,
according to Japan Exchange Group data, nearly double the amount
from all of last year.
The exchange's next reform phase, due to commence in October,
will tighten liquidity standards for Topix companies and press
them to improve efficiency of cash usage.
"Many of the small and mid caps are cash rich, so the new
reform may add further pressure on those companies," said
Kazunori Tatebe, chief strategist at Daiwa Asset Management.
Those two forces - index-level distortion from the AI boom and a
fresh regulatory push - are converging to put a spotlight on
Japan's smaller, cash-rich companies that have largely traded
under the radar.
DEEP DISCOUNTS
Many smaller Japanese companies continue to trade at deep
discounts because their value is unnoticed, and some do not have
any analyst coverage, according to Tatebe.
Nippon Kodoshi, another lesser-known name, makes
specialised paper known as separators used in components of AI
servers, smartphones and home appliances. It controls about 60%
of the global market for the product.
The company trades at 24.4 times earnings compared with 88
times for Taiyo Yuden, a darling of the AI sector. Taiyo Yuden,
a leading maker of capacitors used to regulate power in AI
servers, has risen 240% this year to become a key component of
the Nikkei's surge.
"We don't have a company like Nvidia ( NVDA ) in Japan, but
we have many companies that are skilled at manufacturing
equipment and materials," said Hiroki Takayama, director at
BlackRock who manages its Japan Small & MidCap Opportunities
Fund.
Takayama's fund has grown 16-fold since its start in 1998,
compared with nearly threefold growth for BlackRock's Japan
Equity Fund, which focuses on large caps, over the same period.
One of the constituents of his fund, Kioxia ( KXHCF ), is a prime
example of a smaller company turning into a giant.
The chipmaker's market value has jumped as much as 50-fold
since its market debut in 2024, briefly exceeding Toyota Motor's
value last month.
($1 = 163.0400 yen)