Investment sun rises over Japan again
For the past two decades, at least, Japan has had its fair share of economic troubles. There have been a number of false dawns that led to spurts of interest for investors here, only for them to be let down again. But maybe — just maybe — this country has finally turned a positive economic corner.
One of the reasons behind “now” being a good time for investors to consider Japan once again, is that the financial markets here have remained unscathed by the ‘credit crunch’ and, more importantly perhaps, the corporate sector is performing well.
Profits are good and dividends are increasing. Fund managers are highlighting this part of the world as there would seem to be a new economic cycle in the offing.
This is evidenced by a number of economic indicators. GDP growth per capita has outperformed most of the OECD countries over the last five years- including France, Germany and the US.
Japan’s export volume has doubled over the last six years and continues to rise. It has also been able to build up an enormous current account surplus as a result of growing exports. And the country’s financial revenue as a percentage of GDP has grown from 1% in 1997 to 2.5% today, creating enormous wealth.
Against this background, Japanese equities have become very cheap. For only the third time in the last 40 years, the yield on 10-year Japanese government bonds has fallen below the dividend yield on Japanese equities.
On each previous occasion this has proved to be a good buying opportunity, and this time round will probably be no exception.
Clearly, moments of this kind do not come along too frequently, for buying into this negative yield gap has historically returned a significant gain in the following months.
Interest rates are low and, as I have said already, Japan has been able to sidestep the credit crunch that is currently plaguing most western economies. Japan has, to put it mildly, hugely under-performed.
Up to 1998 the Tokyo stock market under-performed the FTSE All Share and the S&P500 Indices significantly, but since then it has been effectively trading sideways and is back to the bottom of that range.
Put simply, Japan is cheap, not just relative to its own history, but to the rest of the world.
Furthermore, the yen has devalued for 12 years. In the summer of 2007 the real effective exchange rate fell to levels not seen since 1985 — a landmark year in stock market history with the signing of the Plaza Accord.
This was an agreement among France, Japan, the UK, the US and West Germany to depreciate the value of the US dollar against the yen.
This resulted in the yen appreciating sharply and was one of the triggers of the Japanese bubble in 1989, which the Japanese economy has spent the last 20 years digesting.
Add to that other indicators like low inflation, bank lending and personal income and it is clear that Japan has started a new economic cycle. The problem for the investor will be how to buy into this market. It’s all very well saying that the good times are about to appear, but which sector will deliver the best growth in this economic upturn?
You can of course turn to your stockbroker to buy direct equities and take their advice. But if you are buying a unit trust for your ISA, for example, how do you decide which fund is going to make it? Start with a fund manager who is doing more than just tracking the index. Look for funds that have out-performed the index over the last two to three years.
And look to see if any changes in volatility have occurred — a sure sign that real, active management is going on.
Lastly, don’t wait until the market has risen substantially before getting in. It will be too late to make any profit.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk