Japan may not be quite the rampant tiger economy it was, but it looks like good value at the moment.
Japan's post-war "economic miracle" drove the country on to ever greater economic heights which, from the investment point of view, peaked in December 1989 with the Nikkei at a dizzyingly high 38,957. Since then, it's been down, down, down as the Nikkei chart shows. The last time the Nikkei was at this level, we hadn't even started the miners' strike, the new romantics were, well …new, and for those old enough to remember it, "Big in Japan" hadn't even been a hit yet.
During the 1950s, 60s and 70s, Japan enjoyed spectacular growth. This slowed a little in the 80s, but the country still managed to turn in a 4% GDP growth average during the decade of big hair and Filofaxes. Since then, the economy hasn't been quite as bright in the land of the rising sun. Falling share and property prices pricked the Japanese asset price bubble and the 1990s were relatively stagnant compared to the growth seen in other developed economies.
Perhaps second and third generation Japanese people are more interested in living the high life than driving production ever higher? The sheer fact that the Nikkei has fallen so far has tempted investors in on numerous occasions. Ever since the really steep declines of the early 90s, the Nikkei has rallied sharply on good macroeconomic news, before testing new lows.
Overall value
But notwithstanding this relative economic stagnation and worldwide recession -- do Japanese stocks really deserve to be trading around their book value -- as they are on average today? It seems the main reason for this is the correct perception that Japan, the second largest economy in the world and a net exporter specialising in things which are often first to be cut like cars and consumer electronics, is highly leveraged to global economic growth.
The drop-off in demand from the West has hit Japan's export economy very hard. According to The Economist, foreign trade is down by a third. Japan's economy is expected to contract by 6% this year, making it the worst-hit among the biggest world economies. Also, industrial overcapacity is thought to be higher than in America or Europe.
But does this also mean that Japan will be the first of the major industrial nations to benefit as the worldwide economies emerge from the slump? Maybe. But either way, for the contrarians and value hunters amongst us, the Japanese market looks like a very interesting play on a book value basis alone. The fact that everyone seems to have lost interest adds weight to this argument.
A missed boat?
Perhaps the boat has already left? The belief that things couldn't get any worse, and the recovery of other stock markets around the world helped lift the Nikkei by around 40% since March, when it hit a 26-year-low. But in any kind of historic terms, the index looks cheap as a five-year chart shows.
Much if your view will be affected by how far you're prepared to zoom out. Day traders or those looking for very quick returns could well be disappointed. The Nikkei tends to fluctuate pretty wildly and it's always important to remember that no-one really knows what will happen. But for longer term investors some of the signs look good. Last year Japanese firms spent a record amount acquiring businesses abroad, and the buying has not abated, according to The Economist. Also, Japanese banks have stronger balance sheets and much less exposure to US housing-related debt, whilst household debt is much lower than in the UK and USA.
This is all mega macro-economic stuff of course. But sometimes it pays to completely zoom out and take the widest angled view possible.
Next week, we'll have a look at some interesting ways to invest in Japan.
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