Japan looks a good home for your money

When the world’s lender of last resort turns around and says it’s running out of money, you know we’re in trouble.

The head of the International Monetary Fund (IMF) has warned that it might not have enough cash to fund any more bail-outs within the next six to eight months.

Dominique Strauss-Kahn said this weekend that the IMF needs more countries to follow the example of Japan – which has offered to add $100bn to the fund – as the state of the global economy gets worse.

Trouble is, no one else has got any money…

Where will the extra money needed by the IMF come from?

The IMF has got its begging bowl out. The world’s lender of last resort is worried that it won’t have enough money to bail-out all of the countries around the world that are set to go bust this year, with Eastern Europe a particular weak spot.

But outside of Japan, it’s hard to see where the extra money is going to come from. After all, most of the world’s major economies are spending billions bailing out their own populations, never mind anyone else’s.

And yet, for all the billions that are being poured in, they don’t seem to be doing much good. Just look at our own situation, for example.

More than a third of British companies surveyed by the Confederation of British Industry (CBI) have cut jobs in the past three months. Almost two-thirds saw their access to credit shrink during the same period, and roughly the same number expect it to worsen further in the coming quarter.

The fundamental problem facing the British banking sector – that it’s largely bust – still hasn’t been resolved. And even if it had, it wouldn’t matter. Banks are now in “head for the bunker” mode. This is what happens when you have a recession. The banks, quite rationally, pull in their horns, because in a recession, lending becomes riskier. The number of people who won’t pay you back goes up.

The same thing is happening in the US. The trouble is, if your economy has run on nothing but an ever-increasing supply of credit for years, then as soon as you yank the credit out of the equation, there’s nowhere to go. Any income generated needs to go to paying off the debt rather than investing for the future. All the banking bail-outs in the world will not change that fact.

Will emerging markets see a flood of Japanese investment?

So what about the country that did give to the IMF? Well, although Japan is getting hammered by sliding export demand, it still looks to be in a better condition than its indebted rivals.

The strong yen might be hurting exporters, but Japanese companies are also taking advantage of it to quietly splash out on some tasty-looking cheap assets. The total value of overseas takeovers more than tripled to $76.8bn last year, says Bloomberg.

And Japanese savers have some clout left too. Kenichiro Ikezawa of Daiwa Investments tells the news wire: “A lot of assets have got extremely cheap and Japanese investors are looking to park their money somewhere.” So where’s that money going to go? Well, Ikezawa reckons that “emerging markets including Brazil, Mexico and Turkey look attractive.”

You can see why a Japanese investor might be tempted. As well as the generalised falls in emerging market stocks seen in 2008 (in common with everywhere else), the yen climbed by 60% against the Brazilian real last year, reports Bloomberg, 55% against the Mexican peso, and 62% against the Turkish lira.


Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.


And if the yen weakens this year – perhaps if the central bank intervenes to try to weaken the currency and help out exporters – then any Japanese investor holding overseas assets would see a nice boost to their value. According to Bloomberg, Japanese investors could “earn a 25% total return this year on Brazil’s local currency bonds”, taking account of expected yen depreciation and the hefty interest rate available on Brazilian sovereign debt (interest rates in the country are at 12.75%).

Japan looks a good home for your money

But of course, emerging markets do come with their own risks – and I’m not sure that they are the place that any conservative investor wants to put their money at the start of a global recession. And the yen may not fall in line with analyst’s expectations. So it seems a little optimistic to imagine that the Japanese might dive into emerging markets now.

The truth is that if Japanese investors are looking for cheap assets, on a yield that beats the country’s measly 0.1% base rate, then they don’t need to look much further than their own stock market.

The average dividend yield on the Topix is 3%, while the majority of stocks trade at below their book value. Given the choice between cheap companies operating in the world’s second-biggest economy, or cheap companies operating in promising, but unproven emerging markets, I know which I prefer. And while I can’t be sure that Japanese investors will agree, that shouldn’t put you off. You can get exposure to Japan via the iShares MSCI Japan index (LSE: IJPN).

Our recommended article for today

Why we should be wary of Keynesian solutions

We’re not in a liquidity crisis, we’re in an insolvency crisis. And the fashion for Keynesian solutions means private bankruptcy could soon go public. So what can investors do?