Invest in Japan?

by | Aug 16, 2001 | Archives

Our most recent messages looked at Top Value major and emerging markets, but did we miss Japan?

Our recent messages did not look at Japan one of the major markets in the world. This fact was brought home when a reader sent this message.

	"Gary,		I think it is important to point out to your readers a very cautionary 	tale...that of the Japanese Stock Market which on Friday fell to its lowest 	point since December 1984! That means that people who invested in the market 17 	years ago have not made a single penny in return. It is important for your 	readers to know that history shows that it can take many years for bubble stock 	markets to recover fully. Just imagine how the people who invested in the 	Japanese market at its 1989 peak (around 39,000 on the Nikkei) feel with their 	investment worth less than 1/3 even after waiting more than ten years.		Hope you and Merri are well."

This is a message that investors in U.S. shares should ponder. A recovery from a bubble can take a very long time.

Yet this message also started me thinking. “If the Japanese market has fallen so far (the Nikkei has fallen from 39,000 in 1989 to 11,609 this last month), is this now a good value market?” A recent article on Dow Jones Newsletter showed that the market looks gloomy as it pointed out that Japanese stocks slid to a 17-Year Low on renewed technical worries.

“Could this be a sign that this is time to invest”, I asked?

The Dow article pointed out that the Nikkei 225 average tumbled to its lowest close in almost 17 years Monday based on worries about technology company earnings that caused blue chips in that sector to have heavy selling.

The benchmark index fell 257.50 points, or 2.2%, to 11477.56, its lowestfinish since December 1984. The drop followed a 19.50-point fall Friday.

Declining prices outnumbered advancers 988 to 339, with 133 issues ending the day unchanged. Volume onthe TSE first section was estimated at 451.40 million shares, the lowest turnover for a full-day session since last December, and well down from Friday's 606.19 million shares.

The Topix index of all TSE first section issues fell 15.40 points, or 1.3%,to 1167.09, still above its lowest close this year of 1161.97 recorded March14. The near-term September Nikkei futures contract ended down 270 points at11500 on the Osaka Securities Exchange.

“Uncertainties as to when high-tech sector earnings will bottom out havestrengthened since the downward earnings revisions by Advantest and otherslate last week,” said Masatoshi Sato, chief strategist at Mizuho InvestorsSecurities.

Among the heavy losers in the technology sector, Rohm was sold off after itsprofit warning Friday, finishing ask-only at 15,520 yen. The company blamedthe slump in the information technology market for a sharp cut in itsparent-only outlook for the year to March.”

But one day does not make a market. So to get further clues, let's look at Jeremy Grantham's recent thoughts on Japan.



Grantham, is renowned as one of the philosopher-kings of the investment world and he feels that Japan is a big chunk of the market so it is hard to see it as irrelevant. But he feels it is impossible to predict. Prior to his firm's anti-blue chips and value stand, by far his bravest and biggest bet was anti-Japan. Three years before the peak he went to zero in Japan. It had never sold over 25 times earnings and when it got to 45 he thought it was ridiculous. He got out and Japan rose and it rose to 68 times earnings and 65% before it collapsed.

He feels that now on one hand, Japan has certain aspects of scrap-metal value, but its fundamental problems are so uniquely bad and so obviously unresolved that it is capable of making a huge rally if it gets lucky, stumbles on the right strategy. But basically the stock market has no material value at all. If you mark down their asset base by 25%, you'll find they are so leveraged there is no asset base. Under the worst scenario, the entire corporate sector may have no value. These kinds of thoughts are way off the radar screen. If they get it right they can have a huge rally and be the strongest market in the world. If they get it wrong they can basically evaporate.

Grantham chooses to make no bet on that as he simply has no insights. His only insight is that the range of outcomes is so vastly uncertain as to be overwhelming and feels there are better bets he can risk his firm's reputation on.

This fits with my philosophy to invest only in what you know!

Michael Keppler ( rates Japan as a neutrally rated market, but notes that even at this low stage Japanese shares still have the lowest return on equity of any major market (5.1% as compared to 12.4% world average). Japan also has the third lowest cash flow return on equity (19.6%) as compared to the world average of 23.9% .

In other words Japan may appear to be a great value relative to its recent history, but it still looks like a lousy value compared to other major markets.

My view is that Japan is still one of the most insular major nations on earth. Its desire to maintain racial and cultural purity may be admirable in some ways but this has hurt Japan's ability to integrate into the global economy. Massive immigration in the U.S. and Europe has brought wave after wave of new thoughts, ideas, ways of doing things and new energies and ambitions. This has created an openness to new ideas and new ways that Japan has missed. Nature's way is to blend, recreate, reinvent, change and grow. This brings a dynamic progress into an economy that Japan does not have. This nation is holding onto too many of its old ways. This has made the nation terribly inefficient and unproductive.

The catch is because a small part of the economy that exports did change (using tactics learned from Americans), Japan was viewed for many years as a progressive, efficient country. This in part caused the Japanese stock market bubble in 1989. Yet when the bubble burst, Japan changed little. All the way down they haven't solved a thing. My view is that Japan needs to dramatically devalue the yen, to dramatically increase its exports and to dramatically alter its ways of doing business. Until then my opinion is avoid Japanese shares in general.

Tomorrow we'll look at why this creates an incredible opportunity, but not in Japanese shares.

Until then, good global business and investing!