Japan shares to benefit in value investing revival, Daiwa CEO says

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By Makiko Yamazaki and Ritsuko Shimizu

TOKYO (Reuters) - Japan's stock market is drawing renewed interest from overseas investors, as global inflation bolsters the case for value investing while Japan's shares remain undervalued despite record profits, Daiwa Securities Group Inc's CEO told Reuters.

"Japan is one of the most prominent markets for value stocks," Chief Executive Seiji Nakata said in an interview.

He pointed to billionaire Warren Buffett's recent investment in Japanese trading houses and a surge last month in foreign investors' net buying of Japan shares as evidence of the trend.

Historically, value stocks, or stocks trading below their intrinsic value, tend to outperform growth stocks during inflationary periods, underpinned by solid earnings and cash flow.

Interest rates are rising across the globe as central banks battle rising prices, with even the Bank of Japan - which long resisted monetary tightening - announcing policy tweaks this week that would effectively allow long-term rates to rise.

As higher rates turn global investors' focus to value stocks, the Japanese market "would be advantaged", Nakata said.

Japan's forward price-to-earnings ratio, which measures share prices relative to expected earnings per share, stands around 12 for the TOPIX 500 index, lagging Wall Street's benchmark S&P 500 index at about 17.

Nakata also said rising shareholder activism helped to make the Japanese market more attractive, pushing companies to unwind cross-shareholdings, reconsider their portfolios of business activities, and boost board diversity.

Rising foreign interest in the Japanese market was evident in November, when foreigners bought a net 1.287 trillion yen ($9.77 billion) of Japanese stocks, the highest in two years, according to the Tokyo Stock Exchange.

Japan last saw aggressive buying by foreigners around 2013, when hopes for former premier Shinzo Abe's "Abenomics" policy of massive monetary and fiscal stimulus were at their peak.

Berkshire Hathaway (NYSE:BRKa) Inc, run by the world's best-known value investor Warren Buffett, also grabbed headlines in November when it revealed it had raised its stakes in Japan's five biggest trading houses to more than 6% each.

($1 = 131.7100 yen)