Japan: offensively cheap

published 17 October 2008

Japan, like other markets, had a horrible time last week before bouncing back this week; the Nikkei 225 is still almost 405 down on the year. Yet the fundamentals are not nearly as bad as this slump implies. Instead, Japan looks in far better shape than other developed economies. The recession should be "shallow and short-lived", says Capital Economics. Receding inflation amid tumbling commodity prices look set to bolster consumer confidence and spending power, while banks have scant exposure to subprime and companies have undergone pervasive restructuring over the past few years, so they are less vulnerable to tighter credit than their Western counterparts.

Indeed, cash-rich firms have been on a global acquisitions spree of late. Goldman Sachs reckons Japan is well placed to lead the advanced economies out of the slump, says Chris Flood in the FT. The market is "offensively" cheap, as Jonathan Allum of KBC puts it, falling to less than book value last week. Global markets tend to fall together when risk aversion rises, so further falls can hardly be ruled out. Yet for those keen to risk a punt on equities just now, Japan looks far more appealing than any other market.