Buy Japan, says Marc Faber

published 31 October 2005

The bullish case for buying Japanese shares is very simple, says Marc Faber in the The Gloom, Boom and Doom Report. Bearish sentiment about the economy and equities and "bullish sentiment about Japanese bonds" reached an extreme last June. At the time, economic pessimism was such that individuals and institutions had become heavily overweighted in Japanese Government Bonds (JGBs), which yielded less than 0.5%, but "grossly underweighted in equities". However, "I am a strong believer that June 2003 marked a secular low for Japanese interest rates" and that we will not in our life times see JGB bond yields of less than 0.5%. That in turn means that, over time, institutions and individuals "will be selling bonds and buying equities and that this asset allocation shift will lead to a long-term rise in Japanese stocks".

Certainly, positive economic news has "tumbled out of Tokyo" recently, says Karen Lowry Miller in Newsweek. Industrial production and domestic demand are both stronger than in Europe (output rose 3.3% month on month in January and capacity utilisation is high), confidence is up, prices are falling at a slower rate than in the past and pockets of the economy are even showing the first signs of inflation (see page 34). At the same time huge numbers of corporations have restructured their balance sheets and now "generate cash equivalent to 10% of GDP". Further optimism, says Michael Hughes, chief investment strategist at Barings Asset Management in London, comes from the fact that, after years of stagnation, the Japanese population in the key spending age of 35-55 "is finally growing again". This is heady stuff for fund managers: "We've all waited about 13 years for Japan, so when it does happen people get fairly excited about it," says Hughes. Certainly they do, says Jonathan Allum of KBC in The Blah. Foreign buying of Japanese equities is near record highs and this "exuberant enthusiasm for all things Japanese" shows little sign of abating. Indeed, a recent survey of fund managers showed that many are still looking to buy in further. Interestingly, the Japanese market has for years been considered to be cyclical, yet the upbeat view towards it has coincided with "a distinct cooling of attitudes towards the global economy". Could it be that the market is beginning to believe that the domestic economy is making a real long-term recovery?

Andrew Nagle, who runs the Legal and General Japanese fund, certainly thinks so, says Jenne Mannion in The Daily Telegraph. He has sold his house and is moving into rented accommodation so that he can invest more heavily in Japan. Good move, says Faber. All in all, Japan is one of the few places left in Asia where you can be pretty certain of getting value.