You should be investing in Japan’s quiet bull market

Japan’s stock market recovery has gone largely unnoticed by investors, says John Stepek. Now’s your chance to buy.

Japan spent much of the start of 2013 as the hot' new stock market.

Prime minister Shinzo Abe's plans to reflate the economy had begun to win over even the bears. The Bank of Japan's aggressive money printing helped send the yen tumbling, and the Japanese stock market soaring.

Then in May, the market tanked. Having hit a 2013 high of nearly 16,000, the Nikkei plunged nearly as low as 12,000.

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Suddenly, every other headline was declaring "the failure of Abenomics". It was yet another false dawn in Japan's long tale of perennial disappointment. Everyone could get back to ignoring Japan.

That's good news for Japan bulls like us. Because it means that very few people have paid any attention whatsoever to Japan's remarkable recovery since

An investor's most important tool

Japan's crash in May was brutal, particularly for anyone who came late to the party. But in the context of the surge seen since late 2012, it could also be seen as a healthy correction.

When markets run up quickly, they get frothy. Short-term traders chase the market higher, and then bail out as fast as they rushed in when the trade turns however briefly against them.

Watching this sort of market action and the reactions of other investors can teach you lots of useful lessons. I believe there's a good long-term argument for buying into Japan. I believe that, in the long run, the Nikkei 225 will be far above the 15,900 peak it hit in May. So when I drip-feed money into Japan each month, I'm not too worried about what it's been doing over the last couple of weeks.

But when you see a market particularly a major market like Japan shooting up at a rate of 10% a month or more, it's easy to get carried away, despite all good intentions. Your head might be saying: "I'm buying for the long run." But your gut is saying: "This market went up by 5% last week. If it keeps doing that, I'll be a millionaire by Christmas."

When that inevitably fails to happen, and the obligatory correction sets in, it's easy to panic: "This market fell by 5% last week. If it keeps doing that, I'll be a pauper by next weekend."

That kind of emotional trading is a recipe for investment disaster. And it's very hard to resist. It's why I still think that one of the best tools you can have as an investor is a notebook.

Write down your rationale for making an investment before you commit to it. The simple act of doing that will slow down your thinking process, and flag up any obvious flaws in your decision. It's all about taking the emotion out of the process because that's where your worst mistakes come from every time.

Japan's economy is improving

Getting back to Japan the good news is that the froth seems to have been well and truly cleared from the market. Japan has dropped out of the headlines. And that's allowed it to make a quiet little recovery.

Already the Nikkei 225 has made a steady climb back to around the 14,500 mark. And as Jonathan Allum of SMBC Nikko points out, Japan's more representative TOPIX index recently "completed its best four-week period since 2009".

The nice thing is that this rally is backed up by halfway decent economic data. Abenomics might not be able to take all the credit for the recovery, but it certainly seems to be helping.

Allum points out that Japan is one of the few major economies where economic data is currently still surprising on the upside. And Japanese companies seem increasingly convinced that the good times are returning.

They are starting to expand their investment spending plans. Between 2008 and 2011, Japanese companies as a group cut capital spending. But according to the most recent Tankan survey, big Japanese companies now expect to raise spending on plant and equipment by 5.5% this year.

They've also been making a nod to treating shareholders better. Japanese companies bought nearly $18bn-worth of their own shares in the first half of 2013. That's the most since 2005, according to Bloomberg.

As Jasper Koll of JP Morgan Chase told Bloomberg: "The windfalls of Abenomics more cash flow from a weaker currency and better growth are being reinvested for future growth and to reward current shareholders."

The next big hurdle for Abe is the 21 July election for the upper house in Japan. The opposition currently controls the upper house in Japan, which represents a potential stumbling block for Abe's policies. But it looks as though he is on track for "a big win", says Reuters. Support for Abe's Liberal Democratic Party "far outstrips other parties".

With political obstacles to reform out of the way, Abe can afford to be bolder. Judging by what he's achieved so far, that's likely to be good news for Japanese stocks.

If you've not already invested in Japan, I'd start doing so. If you already have, then stick with it. You can read more about how to invest in our recent cover story on the market: Prepare for Japan's coming shares boom.

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.