Yesterday, I said the US market looked frothy. But that’s not true of every stock market around the world.
So today I thought I’d look at one of the world’s most attractive markets – Japan.
That might sound odd. After all, the Japanese market has had a very good run over the past year, rising by more than 60%. Meanwhile, the yen has fallen by 20% against the dollar.
So any investor who’s been short on the yen and long on Japanese equities has done very well indeed. (And you’ve even made decent gains without hedging the currency – just not quite as stratospheric.)
Yet in spite of these big gains, I think there’s room for more growth in 2014 and beyond. Here’s why…
The secret of Japan’s revival – lots of money printing
The Japanese revival was triggered last year by Prime Minister Shinzo Abe’s new economic policy, nicknamed ‘Abenomics’. The policy is a combination of an aggressive monetary stimulus, an aggressive fiscal stimulus and structural economic reform.
To put that another way: Abenomics is a combination of massive money printing, higher government spending, and attempts to free up the Japanese labour market.
The good news is that the policy seems to be working. For starters, inflation has picked up and risen to 0.9%. In Japan at least, that’s a good sign. Japan needs higher inflation because lengthy periods of deflation since 1989 have held back both consumption and investment.
The drop in the yen is also very welcome. As well as being inflationary, it makes Japanese exports more competitive. In fact, weakening the yen is arguably one of the main aims of the Japanese central bank, although it can’t explicitly state that.
The job market is also improving – the percentage of working age adults in employment has started to rise for the first time since the late 1990s. What’s more, the number of job offers per applicant is at a five-year high, according to BlackRock. That suggests that wage inflation – which is the type of inflation that Japan really needs – could start to pick up, as demand for candidates rises and the pool of unemployed people to choose from falls.
Most importantly, policymakers seem determined to achieve dramatic change in Japan. They are using a ‘big bazooka’ and they are very keen to ensure that Abenomics doesn’t peter out like some previous reform packages we’ve seen over the last 20 years.
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Not everything’s rosy – but Japan is also still cheap
Don’t get me wrong, I’m not claiming everything is perfect in Japan. One big worry is that the sabre rattling with China over the East China Sea islands (the Senkaku islands) might get out of hand.
This week’s economic growth numbers were also disappointing – although as with most things just now, markets are likely to treat this as good news, because it means no imminent end to money printing.
And in the longer run, Japan’s demographics are terrible. There are too many pensioners, not enough workers, and there’s a huge reluctance to allow significant numbers of immigrants to solve the problem.
But despite this, I remain positive. The big point is that the government is determined to make a difference. And as we’ve seen from experience in the US and the UK, when a government and a central bank decide to print as much money as it takes to force markets higher, then they tend to get their way.
More to the point, the valuation of the market looks reasonable too. Japan’s flagship index, the Nikkei, is trading on a price/book ratio of 1.68, well below the FTSE 100 on 1.81 and the S&P 500 on 2.5. Although a price/earnings ratio of 17 looks high at first glance, I don’t think it’s so unreasonable given the profits growth that we’re seeing.
If you want to invest in the Japanese market, the simplest way is to put your money in a low-cost exchange-traded fund (ETF) or an index tracker. The Lyxor Japan ETF (LSE: JPNL) should do the job nicely. It tracks Japan’s Topix index, which includes more companies than the Nikkei, and the annual charges are reasonable at 0.45% a year.
There are plenty of options within the actively-managed area. And unusually for actively-managed funds, Japan has been such a brutal market for so long that the average survivor has actually beaten the market, at least in recent years. My colleague James Ferguson ran through some of the best options in MoneyWeek magazine back in August – you can read his views on Japan, and his fund tips here.
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