Japanese Companies Accelerate Globalization, Innovation and Growth Alpha Not Fully Priced In
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Japanese Companies Accelerate Globalization, Innovation and Growth Alpha Not Fully Priced In
Bernstein points out that the proportion of overseas revenue among Japanese companies has significantly increased, with their innovation capabilities and risk-adjusted returns of growth stocks leading globally, yet valuations remain discounted, offering significant room for valuation repair.
- The proportion of 'globalized Japanese companies' with overseas revenue exceeding 51% has risen from 34% in 2018 to nearly 47%.
- Globalized Japanese companies outperform domestic ones, with year-to-date gains of 15%, higher profit growth expectations, and ROIC.
- Japan's overall R&D ratio leads Europe and the U.S., but its forward P/E is only 16x, lower than the U.S., India, and even Thailand.
- High innovation Japanese portfolios have generated 7% annualized Alpha over the past 10 years.
- Japan's GARP (Growth at a Reasonable Price) strategy has an information ratio of 0.7-0.75, with PEG at only 0.73, offering far better value than the U.S. and India.
Report interpretation
Overview
This report explores the trend of Japanese companies accelerating globalization and its profound impact on investments. Bernstein believes that as more Japanese companies shift their business focus overseas, their profit growth potential is fully unlocked. However, the market has not fully priced in the advantages of Japanese companies in innovation and high-quality growth, with significant valuation discounts still present in the overall Japanese stock market and multiple specific industries, offering investors opportunities for excess returns (Alpha).
Core views
Japanese companies are undergoing a profound globalization transformation. The proportion of 'globalized Japanese companies' with overseas revenue exceeding 51% has risen from 34% in 2018 to 47%/44% in 2024/2025. Beyond traditional sectors like automobiles, tech hardware, and semiconductors, industries such as pharmaceuticals, medical devices, food & beverage, and durable goods have also significantly accelerated globalization. For example, the proportion of globalized companies in pharmaceuticals and medical devices has surged from about 20% in 2017 to 100% in 2024. Globalized Japanese companies outperform in performance and quality. Since 2018, globalized Japanese portfolios have achieved a CAGR of 5%, surpassing domestic companies' 4%; year-to-date gains reach 15%. These companies not offer higher exposure to innovation but also have median three-year profit growth expectations (37%) and ROIC (21%) significantly higher than domestic peers. Exceptional innovation capability but unfairly valued. Measured by R&D expenses as a percentage of sales, Japan's innovation capability leads the U.S. and Europe. Yet, Japan's forward P/E is only 16x, lower than the U.S. and India (21x) and even Thailand (17x). At the industry level, Japan's durable goods, food & beverage, pharmaceuticals, and materials sectors outperform European and American peers in innovation or growth but remain undervalued or only on par, indicating clear revaluation potential. Growth stocks and GARP strategies offer exceptional value. Over the past 10 years, Japanese growth stocks and GARP strategies have generated annualized Alpha of 3.4%-3.8% and 5%-6.3%, respectively. In risk-adjusted returns, Japan's GARP strategy's information ratio (0.7-0.75) leads globally. More importantly, Japanese growth stocks are attractively valued, with PEG at only 0.73-0.76, far below India's 1.22 and even more favorable than the U.S. (0.75).
Analysis framework
The institution adopted an analytical framework combining 'fundamental factor quantification + cross-country/cross-industry horizontal comparison.' First, by defining a threshold of 'overseas revenue > 51%,' the Japanese stock market was divided into 'globalized' and 'domestic' portfolios, comparing their historical returns, profit expectations, and ROIC to confirm the substantive improvement of globalization on fundamentals. Second, using 'R&D to sales ratio' as a proxy for innovation capability, combined with forward P/E and PEG metrics, horizontal comparisons were made among major global markets and within industries to precisely identify mispriced areas of 'high innovation/high growth but low valuation.' Finally, by backtesting factor performance over the past 5 to 10 years, the effectiveness of 'high innovation' and 'GARP' factors in consistently generating Alpha in the Japanese market was validated.
Methodology notes
GARP (Growth at a Reasonable Price) Strategy and Information Ratio (IR)
The GARP strategy aims to identify stocks with growth rates matching their valuations, avoiding paying premiums for excessive growth. The report uses the information ratio (the ratio of excess return to tracking error) to measure risk-adjusted returns, noting Japan's GARP strategy has an IR as high as 0.7-0.75, indicating its global leadership in generating excess returns per unit of risk.
R&D Intensity (R&D to Sales) as a Proxy for Innovation & Brand Value
The report uses R&D expenses as a percentage of revenue as a core metric to measure corporate innovation capability and quantify 'brand value.' Backtesting shows that high R&D intensity portfolios in Japan have generated 7% annualized Alpha over the past 10 years, proving technological innovation is a core driver of Japanese companies' global competitiveness and excess returns.
Cross-Country & Cross-Industry Relative Valuation
By comparing forward P/E and PEG of Japanese industries with U.S., European peers, and other global markets, the report reveals structural undervaluation in the Japanese stock market. This relative valuation method helps investors identify sectors where fundamentals have improved but valuations have not yet repaired the expectation gap.
Key data
- Proportion of Globalized Japanese Companies47% (2024)The proportion of Japanese companies with overseas revenue exceeding 51%, significantly higher than 34% in 2018.
- YTD Gains of Globalized Japanese Companies15%Far outperforming domestic Japanese companies' 4%.
- 3-Year Profit Growth Expectations of Globalized Japanese Companies37%Median expectation, higher than domestic companies' 24%.
- Forward P/E of Japanese Market16xLower than the U.S./India (21x) and Thailand (17x).
- PEG of Japan's GARP Strategy0.73Highly attractive valuation, lower than the U.S.'s 0.75 and India's 1.22.
Impact & implications
The report argues that Japanese companies' global expansion is not merely a shift in revenue geography but a systematic upgrade in profit quality and innovation capability. As more Japanese companies deeply engage in high-growth global markets, the long-standing 'valuation discount' logic of the Japanese stock market will be broken. For global investors, now is an excellent window to invest in Japan's high innovation companies and GARP strategies, as Alpha in these areas is not yet fully priced by the market, promising a dual repair in performance and valuation in the future.