Is the Japanese market coming back?
For over 20 years the Japanese stock market has been in a funk. After topping out the last day of 1989 the market value of the Nikkei average fell over 80%. A thousand hearts have been broken—and billions of dollars lost—betting on a comeback for the world’s third largest economy. But the new Prime Minister Shinzo Abe recently announced a 10 trillion yen stimulus package—the equivalent of a $300 billion program over here. Their stock market has rallied 25%, and a lot of folks are wondering if now is the time.
Certainly, a generous fiscal package and an expansive monetary policy is a start. The fiscal package could stimulate spending in key areas, and a monetary policy that reverses the Yen’s appreciation of the past few years could seriously help exporters like Toyota, Canon, and Sharp Corporation. But is Japan’s economy too indebted, too old, and too corrupt to begin to grow again?
Not necessarily. Unlike the periphery of Europe or even the United States, Japan’s debt is primarily internal. Its elderly population is the primary holder of government debt. That means that with the right combination of estate taxes and investment incentives, much of that debt could be retired without crippling the economy with high marginal tax rates.
Some people claim that Japan’s stock market is cheap, because the ratio of market price to book price is historically low. But book prices are a poor proxy for value, especially for an entire market. It goes to the question of what something is worth: for a financial asset, its value should be based on the ability to generate positive cash earnings. Book value is simply an historical record of what someone was willing to pay in the past. For long-lived assets, circumstances change, and book value becomes increasingly irrelevant. Does anyone think a Kodak Instamatic factory is worth anything like what the owners paid, unless it is re-purposed?
Japan has been a classic value-trap—always looking cheap, until it gets cheaper. Based on current earnings, the market is still expensive relative to other markets around the world. But with a new government seemingly willing to take its economy in a new direction, the market bears watching.
Douglas R. Tengdin, CFA
Chief Investment Officer