Japan: -4.6% Underperformance, 24% Cash Periods
OCF momentum returned 3.2% annually on Japanese stocks, underperforming SPY by 4.6%. 24% cash drag + weak shareholder orientation = signal failure. Cash generation without value creation.
OCF momentum returned 2.9% annually on Japanese stocks, 2000-2025, underperforming the Nikkei 225 by just 0.4% per year. The Nikkei returned 3.3% annually. The strategy held cash in 6 of 25 years (24% of periods) due to strict filters eliminating most Japanese companies. When invested, it held 27 stocks on average but suffered a -53% max drawdown. $10,000 grew to $20,700 vs Nikkei's $22,020. Nearly neutral performance: the signal doesn't add value but cash drag explains most underperformance.
Contents
Data: FMP financial data warehouse, 2000–2025. Updated March 2026.
What We Found
| Metric | Japan (JPX) | S&P 500 |
|---|---|---|
| CAGR | 3.2% | 7.8% |
| Volatility | 18.9% | 16.2% |
| Max Drawdown | -52.3% | -36.3% |
| Sharpe | 0.16 | 0.45 |
| Cash Periods | 6 of 25 | 0 |
| Win Rate | 28% | - |
24% cash drag hurt performance. The ROE > 10% filter eliminated most Japanese companies (average JPX ROE is ~8%). When invested, the strategy picked companies with improving cash flow that went nowhere due to weak shareholder returns and corporate governance.
Best year: 2012 (+48%) during Abenomics. Worst year: 2008 (-32%) during financial crisis. But 17 of 25 years showed underperformance.
Why it failed: Japanese companies generate cash but don't return it to shareholders. The OCF signal caught cash generation but not value creation. Cultural/structural issues (cross-shareholdings, weak governance) mean cash flow quality doesn't predict returns.
Part of a Series: US Results | India +5.4% Alpha | Canada Best Sharpe | Global Comparison
Run It Yourself
Screen Japanese stocks with OCF momentum on Ceta Research
Market cap threshold: ¥100B (~$680M USD), ROE > 10%, operating margin > 5%, OCF growth > NI growth.
Takeaway: Japan is a cautionary tale. OCF divergence captures cash generation but not what companies do with that cash. In markets with weak shareholder orientation, the signal fails.
Data: Ceta Research, JPX 2000-2025. Full methodology: backtests/METHODOLOGY.md
