Ian Cowie: which trusts can ride the waves in this top market?

Tsunami is the Japanese word for a shock wave that can cause massive damage many miles distant from where it originated.

Something similar might happen this Sunday, 8 February, when an event in Tokyo could hit global stock markets far away from the world’s fourth-largest economy.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Sanae Takaichi, the first female prime minister of Japan, has called a snap election, seeking validation for bold economic reforms intended to stimulate growth after decades of deflation.

But her self-professed admiration for the UK’s former leader Margaret Thatcher has not been universally welcomed by voters or the money markets and it is by no means clear that Takaichi will win.

Bond yields hit 4% for the first time in Japan as the price of government debt plunged. So has the currency, with 157 yen now required to buy $1.

Bear in mind that 40-year Japanese Government Bonds (JGBs) used to yield next to nothing five years ago, when they were regarded as among the safest in the world, and you needed only 105 yen to buy the greenback.

These apparently technical indicators could be the first ripples of much worse to come, because of the global importance of Japan’s massive bond market and its influence on American share prices, especially low-yield Magnificent Seven technology stocks.

• Nine investment trusts to generate a £10,000 income in 2026
• 10 funds to produce a £10,000 income in 2026
• Gold, silver and defence: reasons to be bullish and bearish

If Japanese government bond prices collapse, forcing yields skywards, US shares could take a bath - and not in a nice way.

But that’s the worst-case scenario and optimists argue that Takaichi’s $135 billion (£99.2 billion) stimulus package will be beneficial, because a weaker yen makes Japan’s exports cheaper for foreign buyers.

Fortunately, investment trusts enable shareholders of all sizes to diminish the risk of events beyond our control and gain professionally managed exposure to markets that trade while we are asleep.

Perhaps surprisingly, given the worries described above, Tokyo’s main share price index, the Nikkei 225, is the top performer among the world’s biggest markets over the last year, having delivered total returns of 39%.

By contrast, Britain’s FTSE 100 generated 20%, while the American Dow Jones lagged behind with 10%.

Never mind the macroeconomics or the market benchmarks, investment trust shareholders have also been rewarded recently, after years under a cloud in the Land of the Rising Sun.

For example, the average fund in the Association of Investment Companies (AIC) Japan sector delivered 27% over the last year, after an underwhelming 17% over five years and a more satisfactory 178% over the decade.

JPMorgan Japanese Ord (LSE:JFJ) is the long-term leader with a 10-year return of 210% but that fell back to 12% over five years before recovering to 29% over the last year.

Underlying holdings include the electronics group Sony Group Corp ADR (NYSE:SONY); the sports goods-maker Asics; and the video game giant Nintendo that began making playing cards in Kyoto in 1889.

JFJ delivers a modest dividend yield of 1.2%, with low ongoing charges of 0.46% and its shares are priced 5.6% below net asset value (NAV).

• Top 10 most-popular investment trusts: January
• 10 hottest ISA shares, funds and trusts: week ended 30 January 2026
• The fund firm topping the performance charts

CC Japan Income & Growth Ord (LSE:CCJI) leads its sector over five years with total returns over the usual three periods of 207%, 98% and 30%.

Managed by Chikara, the Japanese word for “strength and authority”, this fund owns shares in the motor-related bank Mitsubishi UFJ Financial Group Inc ADR (NYSE:MUFG); the insurer Tokio Marine; and, once again, Nintendo. CCJI yields 2.5% and trades at a 6% discount to its NAV.

Schroder Japan Trust Ord (LSE:SJG) is the short-term leader, having delivered 208% over the decade, 88% over five years and 36% over the last year.

Its top holding is the electronics conglomerate Hitachi, with the motor giant Toyota Motor Corp ADR (NYSE:TM) also featuring in this fund’s top 10. SJG pays an enhanced dividend of 4% of NAV, giving it a sector-leading share price dividend yield. The shares trade on a 7.8% discount.

Investors who fear they have missed their tide among Tokyo’s blue chips or big businesses, might consider the AIC’s Japanese Smaller Companies sector, which hasn’t seen such a sharp recent recovery.

Nippon Active Value Ord (LSE:NAVF), launched in 2020, is the short and medium-term sector leader with total returns of 123% and 20% over the last five and one-year periods.

• Are high fees chipping away at your investment returns?
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• As goes January, so goes the year: trading signal or noise?

As you might expect among foreign smaller companies, none of the underlying holdings meant much to me. With a modest dividend yield of 0.8%, ongoing charges look steep at 1.18%, and there is a negligible discount of 0.4%.

Meanwhile, Baillie Gifford Shin Nippon Ord (LSE:BGS) suffered a loss of 44% over five years before a positive 18% gain over the last year. Its yield is even more meagre at 0.4%, with 0.8% charges and a 7.2% discount.

A new issue of Japanese government bonds, which is imminent, will give some indication of whether the bond market believes that Japan’s recent recovery has further to run. A negative outcome could be felt far beyond the shores of the archipelago.

Sunday’s general election is likely to be decided by how many young people, who favour Takaichi, actually turn out to vote, compared with older folk, who do vote but are more concerned about the impact on their savings of higher inflation and a weaker yen.

By Monday we should know whether Japan’s first female prime minister can follow Thatcher by gaining re-election, or, perhaps, turn out to be more like Liz Truss.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS) and Schroder Japan (SJG) as part of a globally diversified portfolio of investment trusts and other shares.