Japan telecoms seen less attractive as competition, valuations weigh
Revenue rose 6.3% as growth shifted to lower-margin businesses.
Japan's telecom sector has become less attractive to investors than its regional peers as intense competition, higher valuations, and lower dividend yields weaken its investment case despite continued revenue growth.
Morningstar Equity Research said in its Asia Telecom: 2026 Q2 report that the Japanese telecom market remains "uncomfortably competitive".
The country’s telecom service revenue rose 6.3% and reported operating profit increased 1.6% in the March quarter, marking the third consecutive quarter of growth.
Morningstar said underlying telecom operating profit was likely still in slight decline as much of the revenue growth came from lower-margin businesses including finance, energy, and internet data centres, whilst higher-margin mobile services revenue remained broadly flat.
Japanese telecom stocks trade close to fair value, with an average price-to-fair value ratio of 1.01 and an average forward price-to-earnings (P/E) ratio of 14.7 times. It also offers the region's lowest average forward dividend yield at 3.6%.
Amongst Japan's major telecom operators, SoftBank was the highest-rated stock with four stars, trading at 0.92 times fair value and offering a forward dividend yield of 4.2%.
NTT and KDDI each held three-star ratings, trading at price-to-fair-value ratios of 1.03 and 1.07, respectively.
Rakuten Mobile, meanwhile, remained subscale and continued to work towards profitability, but its mobile operating income is not expected to break even until 2028 or 2029.
Despite reduced EBITDA losses in the March 2026 quarter, higher capital expenditure widened Rakuten Mobile's free cash flow deficit to about $307.8m (JPY50bn) from $184.7m (JPY30bn) a year earlier, Morningstar said.
The report cited China and Korea as the preferred markets for investment due to their stable competitive environments and attractive valuations, whilst Singapore remained highly competitive following a failed merger.
(US$1 = JPY162.44)
