Japan. Could it finally be time?

Japan. We’ve written on it a million times. We’ve stayed relentlessly bullish on it despite the opportunity cost and the loneliness of the position. We’ve put up with mockery and endless accusations of blind-spottery.

Why? Because the yen has been too strong and Japanese stocks too cheap for too long (they are “priced for technical insolvency”, one analyst told the FT this week). And, being long term investors, we decided just to take a position and wait (it worked with gold after all). It hasn’t gone that well.

US stock markets have doubled since their post-Lehman lows. But over the same period, Japan has seen a pretty extreme upturn in the yen and a total market gain of a mere 10% or so. MoneyWeek readers will have been protected to a degree by the rise in the currency value of their holdings (up 50% against the won and 30% against the dollar and the euro since 2007). But nonetheless, I dare say most of you wish you’d been holding almost anything but Japan since the financial crisis began.

Good news then that this might – just might – be the year it all works out. Investors have already embraced what the FT is calling the “Abe Trade” and the market is up by 20% or so since ex-premier Yoshihiko Noda called an election back in November.

The idea is that major money printing in Japan, prompted by a new inflation target or just by a general desire to be in the currency wars for real will push the yen down and the market up. Will it happen? It is already happening.

Japan’s monetary base rose by 5% in November and nearly 12% in December, and by last week the yen had weakened against the dollar for eight consecutive weeks (that hasn’t happened since 1989). New PM Shinzu Abe has made it absolutely clear that he intends to do all he can to weaken the yen to the extent that if the central bank doesn’t go along with his (pretty feisty) plan for a 2% inflation target at its next policy meeting (20 January) he says he will consider revising the Bank of Japan Act.

He is also planning an emergency economic stimulus package (due to be approved tomorrow) that is to chuck something in the region of $230bn into the economy via various tax breaks and credits. Add it all up, says Halkin’s Robert Brooke, and it all shows a “buzz to policy that has long been absent in Japan.”

There is also a tempting theory doing the rounds that some of this is about geopolitics. With China appearing to get stronger and stronger, the Americans need Japan strong too, says Tokyo-based Ryoji Musha of Musha Research. That might mean there is no opposition from the US to a weak yen policy (Musha believes that Japan has been under heavy pressure from the US over the last 20 years or so to “stop the bottle” of its economy and keep the yen strong in order to protect US industry).

Either way, if the yen is allowed to keep weakening- or is strongly pushed to do so  – this will be an event of “historic proportions” which “may well signify” the end of Japan’s 22 year deflation. That would be nice (for investors if not Japanese pensioners).

You can read Bill Bonner’s take on what’s going on in Japan here.

  • Boris MacDonut

    Like they say if you throw enough of it at the wall some will stick eventually. MW will one day be right ,just like the stopped clock manages twice in a day.

  • ricardo

    Japan. Could it finally be time ?

    Time for what exactly?

    Time for the Nikkei to rise and rise and rise and… ?

    Time for Japanese companies to start paying dividends (at any sort of meaningful level) ?

    Time for corrupt Japanese corporate governance not to be run by the Yakuza (the boards Japanese companies are like the most exclusive golf clubs in the world according to Michael Woodford)

    Time for Japanese companies not to continue being massacred by Korea, Taiwan, and China ?

    Time for Japan not to be built on a massive fault line that regularly causes massive economic damage ?

  • Boris MacDonut

    #2 Ricardo.I think the lack of comments on here after 48 hours is testimony to how MW readers feel about the persistent talking up of Japan.

  • Boris MacDonut

    #2 Ricardo.I think the lack of comments on here after 48 hours is testimony to how MW readers feel about the persistent talking up of Japan.

  • ricardo

    Boris, quite so. MW readers aren’t mugs. Well not all of the time.

    Japanese companies will continue to be massacred by their Korean/Taiwanese/ Chinese counter parts. That won’t change.

    In a sentence, there’s nothing there, there really isn’t. I’d like to elaborate, but I can’t. And shouldn’t.

  • Shinsei67

    As always the problem is why bother buying Japan because a weaker yen will push up exporters’ share prices when any share price gain will be offset by said weaker yen.

  • CKP

    The Olympus debacle perfectly illustrates why Japan is a sell. The country is stuffed full of world beating companies that pumps out outstanding products, e.g. Nikon, Toyota, Sony but they are appalling at making a profit. The companies are not run to make profit for shareholders but rather the wellbeing of it’s employees and the wider Japanese society. Instead of trying to crush domestic competition, companies prefer to co-operate and indeed hold large cross-holdings, something illegal in other countries. This culture will not change and their profitability will not change. Price to book means nothing without profits.

  • Peter Cooper

    Japan is the very last place you want to be invested for 2013 as the economy is clearly in terminal decline with 230% debt. Why on earth should Japan turnaround now?