Visit Japan today and you'll find it booming. Tokyo's restaurants are once again dropping bits of gold leaf into miso soup and its shops are packed with people buying luxury goods as fast as they can be manufactured across the water in China.
Above the Louis Vuitton shop on fashionable Omotesando there is even a private members' shop. You get a key to the lift that takes you up to the penthouse club shop floor where you can buy the stuff other people can't Oscar de la Renta dresses, special edition World Cup Havaiana flip-flops and the like.
Now this may sound a bit frivolous, and perhaps it is, but along with the gold leaf it is indicative of the state of the Japanese economy. While the rest of the world worries about a slowdown, estimates for growth in Japan keep rising. First-quarter GDP has just been revised up from 0.5% to a healthy 0.8%, suggesting that full-year growth will come in at over 3%.
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The property bust which saw 20-odd years of falling prices appears to be over. The Tokyo office market has its lowest vacancy rates for five years. The job market has been steadily recovering, consumer sentiment is improving and bank lending is picking up as the private sector regains confidence.
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At the same time company profit margins are at their highest levels for many years, thanks to stringent cost-cutting and restructuring: full-year net profit growth to the end of March came in at about 25% and, while the numbers won't be as good this year, profits are still rising.
One of the biggest reasons to be bullish on Japan, however, is that thanks to the excellent cashflows of the past few years the corporate sector is now awash with cash and ready to spread it around. Capital expenditure is booming as companies update equipment and renovate their premises there are huge retail developments being built all over Tokyo.
So why has the Japanese stock market fallen 20% from its peak in April, and 11% in the past year? The bears will tell you Japan is an export-driven economy that moves in tune with global growth and that, given the concerns about inflation, interest and growth in America, it makes sense for its market to collapse along with those in emerging markets.
But this just isn't true. While the GDPs of most emerging markets are about 50% dependent on exports, that isn't the case in Japan, where a mere 12% of GDP is export-dependent. And as Jonathan Allum of KBC, a consultancy, pointed out last week, the rise in GDP in the first quarter of this year had nothing to do with exports at all. Instead it all came from domestic consumption and corporate capital expenditure (up 13.9%). The growth profile in Japan has changed: it is no longer export-based but is being led by the domestic economy.
I'm not saying I wouldn't have expected the market to fall at all over the past few weeks it couldn't have avoided the carnage completely but it does seem unfair that investors appear to have lumped it in with emerging markets. By the middle of last week Indian stocks had fallen 28%, the Brazilian market was down 22% and Mexico 23%. Saudi stocks were 40% off their highs and the Colombian market fell 10% in one day.
This all makes complete sense. The Middle Eastern markets were absurdly overvalued, as was the Indian market, while the South American and many of the Asian economies remain very dependent on US consumers continuing to spend (which they won't).
It also makes sense that western markets should have fallen. Much of the prosperity in America and Britain has long been based on their overly low interest rates, so knowing that they will soon come to an end thanks to rising inflation (now 2.2% in the UK) is as good a reason to sell as any. It should be no surprise, then, that the Footsie is about 10% off its April peak and the Dow Jones is 8% down.
But Japan is not an emerging market. Its recovery is not dependent on the US or UK, nor is it suffering from the same slowdown in GDP growth. It makes sense that some of the big exporters (Toyota, Sony, Sharp and the like) should have suffered, but overall it seems to me that the Nikkei should have fallen less not more than most other indexes. Markets are rarely rational in the short term, but if I were to pick a global market to buy into for value now, it would be Japan.
First published in The Sunday Times (18/06/2006)
