Forget the recession, Japan is still a buy

Japan may be in recession, but Japanese stocks still represent very good value for money, says Merryn Somerset Webb.


Visitors are pouring in to Tokyo in their millions

A friend emails. She's heading to Tokyo and wants a list of things to do. She knows I'm busy so she has made it as easy as possible her email lists 1-5 and all I have to do is fill in the gaps. So I do.

At the top goes Mitsukoshi food hall in Ginza. Then there is the Nezu museum in Aoyama, just opposite the super-glam building I used to live in back in my Tokyo broking days, and the walk from there up towards Omotesando. This takes you past the best Prada building in the world (the architect calls it an "interactive optical device" I've put a snap on Instagram so you can see what he means find me here @merrynsomersetwebb).

Then head on down towards Harajuku with a spin by the cake shop with the blue tile walls that I have forgotten the name of, and a stop at Candy Show Time where you can watch your own sweets being made.

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After that there is the Meiji Jingu (shrine) to see before you grab a cab back to the Peninsula hotel in Ginza to have several cocktails in Peter: The Bar (it's all about the view over the Imperial Palace Gardens). This is a list I type out relatively often for visitors to Japan and one I usually finish with my habitual warning about prices.

Don't actually buy anything in the blue-tiled coffee shop, I say my mother is still in shock from the piece of cake she ordered in there in 1998. But this time round I didn't add that bit in. Because I took my daughter there for cake late last year and it cost significantly less than the (less good) cake we buy at the caf on the grubby bit of Leith Walk in front of our home in Edinburgh. And you sure as hell can't see a Prada shop from there.

In 2012, Japan decided to deal with its various economic problems (low growth and bouts of deflation) by printing money. Quantitative easing has, as Albert Edwards of Socit Gnrale puts it, "long been dressed up by the Fed et al in a pretentious theoretical framework".

But once we all stop "beating around the monetary bush", the truth is that QE is all about currency war: everyone doing it wants to drive down their currency to make their goods cheaper aboard and gain a competitive advantage without actually being seen to subsidise industry.

That's worked pretty well in Japan. Three years into its money-printing extravaganza, the effect of making everything Japanese cheap in most other currencies (the yen is now the cheapest it has been since the 1970s) is showing. Look at tourism: 17 years after my mother's cake shock, visitors are pouring in to Tokyo in their millions. In October, the total number from abroad was up by 44%; those from China (clearly not as bothered by their own low growth rates as everyone else says they are) were up by 100%.

Assume the same rate of growth in the last two months of the year, says Jonathan Allum of SMBC Nikko, and Japan will have welcomed 19.8 million money-spending foreigners this year alone. That's "within spitting distance of the 20 million target Mr Abe set for 2020". I suspect it is also the explanation for the sudden appearance in Japan's motorway service stations of instructions on how to use their lavatories (again, see my Instagram account). The cheap yen has had a similar miraculous effect on corporate profits they're booming.

It's also beginning to create the inflation the Japanese are so sure they want. Bank of Japan (BOJ) governor Haruhiko Kuroda is targeting 2% core inflation (which excludes fresh food). He isn't getting it it is running at -0.1%. However, if he were to change his target to something less affected by the oil price, things would look better. The BOJ's new core inflation measure (which excludes food and energy) is running at 1.2% and the GDP deflator "arguably the broadest measure of inflation in an economy", says Allum, is already running at 2%.

So what next? A rising number of analysts think that Kuroda might be done with QE 0150 but they're probably wrong. Japan is back in technical recession (real GDP has been falling for two quarters), and the yen hasn't done much weakening for a good few months. If Kuroda wants to follow through on the idea that a cheap currency will kick off growth (and an inflationary wage price spiral) he's going to have to use the cover of his falling core inflation number to print a little more.

Capital Economics reckons he'll be at it by January; this will be good for markets (QE usually is) Japanese stocks are already up 60% since Kuroda started printing. He's buying, Japanese corporates are buying (just as it did in the US, QE has started a buyback boom in Japan) and individuals are now buying too. Around 9.5 million Nisa' (the Japanese Isa) accounts have been opened so far and the total amount invested in them rose 74% in the first half of this year. That's a lot of demand.

I am not suggesting that you invest in Japan purely because there's more money printing coming (although, to be honest, it would be a perfectly good reason to do it) or just because other people are buying (another perfectly good reason).

I'm suggesting it because the Japanese market still looks reasonable value (particularly given that, even as the US enters a profit recession, Japanese company earnings are still rising). And because it is jammed with good and interesting companies in top financial shape with piles of cash cash reserves currently equal around 50% of gross domestic product and plenty of government support.

The most interesting companies in Japan are the smaller ones. Two funds to look at are the JPM Japan Smaller Companies Trust and the Baillie Gifford Shin Nippon (I am a non-executive director of the latter, so you will have to make your own judgement on how good it is). Otherwise the Schroder Japan Growth Fund, while heavily invested in large companies (its top holding is Toyota), also has some bias towards smaller and medium sized companies.

Finally, a reminder: buying Japanese stocks isn't the only way to take advantage of Japanese QE at least think about getting a coffee in Aoyama and a cocktail in Ginza too.

This article was first published in the Financial Times

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.