Japan has been in a bear market for 20 years -- will it ever end?
I once invested several thousand pounds in a specialist Japan fund, but I wouldn't be daft enough to do it again.
The seven barren years my money sat in Save & Prosper Japan was the biggest waste of time in my investment life.
Too many investors have been sucked into Japan in the belief that the world's second largest economy will reignite and fire up their portfolios, but it never happens, and as far as I can see, it isn't going to happen.
Japan is a fascinating country, visit if you ever get the chance, but don't bother investing there.
Big in Japan
All the news coming out of Japan seems to be bad these days. Its growth rate for the third quarter has just been downgraded from an annualised 4.8% to just 1.3%, causing red faces all round.
In November, deflation returned for the first time since 2006, threatening another spiral of falling prices, falling spending and rising unemployment. Japan spent the entire 1990s baffling with deflation, the so-called "lost decade", and it knows better than anybody the damage it inflicts.
The Government has lavished the economy with three fiscal stimulus programmes this year, to little avail. Corporate tax receipts are plummeting, further emptying the national coffers.
The country's ratio of debt to GDP has crept up to nearly 190%, raising the spectre of a possible sovereign default if bond yields rise to unaffordable levels. Yet it still plans to raise another £950 billion through ordinary government bonds in 2010.
Interest rates have been slashed to 0.1% and the Japanese fertility rate is also one of the lowest in the world, at just 1.25 babies per woman. As the baby boomers reach retirement, an ever-shrinking workforce is expected to pay their pensions.
Turning Japanese
If the UK was in such dire straits (and we may soon be), somebody would have turned out the lights by now. But Japan is different.
Japanese people, unlike the British, are keen savers. The country has the highest savings ratio in the world, which means it doesn't have to go cap in hand to the global bond market, because 95% of its debt is owned by Japanese people, businesses and government.
Bond yields did rise recently, but the yield on a 10 ten-year note is still around 1.3%. This puts Japan in a better position to service its debts than the UK or US.
Plus the yen is still strong, which suggests that somebody still has faith in its economy, although that doesn't help exporters sell their products to the US.
Its defenders claim that Japan has shrugged off these problems for years, and will continue to do so.
But to do that it will need people, but its attempts to increase the birthrate and integrate foreign workers have floundered on its social conservatism. Japan looks either unwilling or unable to find radical solutions to its problems.
It can't happen here, can it?
Japan's exceptionalism may see it through this crisis, but there is absolutely nothing there to tempt a UK investor, except one who believes in miracles.
Investors have been waiting for a turnaround for more than two decades, and I don't know about you but my patience wore thin long ago. I haven't regretted selling up and fleeing the country for a moment.
The performance of Japanese stock markets over the last two decades is frankly terrifying. In 1989, the Nikkei 225 hit a high of 38,915 before its equity and property markets collapsed. In 2003, the index hit a low of 7,607.
It picked up this year after the worst of the banking crisis receded, in line with the rest of the world, but now it has nosedived again. Fortis Private Bank recently predicted that it will soon drop back to 9,000.
This should terrify every single equity investor, because it confounds the idea that stock markets always rise over time, and will outperform all other investments in the long run.
The equivalent 20-year disaster would see the FTSE 100 standing at 1,350 in 2020, down from its peak of 6,930 in December 1999. Could you imagine that happening? Who would pay for your retirement then?
It scares the bejeebers out of me.
Sayonara, baby!
Chris Taylor, manager of the Neptune Japan Opportunities Fund, says Japan is one of the few countries to have seen its stock market decline over the year to date. The new government, elected in August, sunk the equity revival by encouraging the yen to rise, hitting exports and financials.
Investors are also worried about the impact of the government's fiscal giveaways, given the country's shrinking savings pool, population and GDP.
Taylor does expect improve corporate earnings in 2010, although only among global companies with little dependence on the domestic economy. These firms have been aggressively cost cutting, and may also benefit from the long overdue depreciation of the yen.
Taylor is pushing a brave face on things (bet he wishes he managed a China fund), but you don't have to.
You can hang on, waiting for that big turnaround. Or you can put your money elsewhere, anywhere, although you might want to avoid Greece and Dubai.
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