Buy Japan while it's cheap

Investors have very low expectations for Japan, but it may well be much less dangerous than it looks, says Merryn Somerset Webb.

I hate taking risks with my money. If it were all down to me, in today's still frightening environment, I'd have all my money stashed in a high-paying savings account. But it isn't down to me. With inflation at nearly 5% on the Retail Price Index (the number we really cared about until only a few years ago) and the UK base rate at 0.5%, it simply isn't possible for anyone even someone who pays no income tax at all to make a real net return on cash.

The Bank of England has effectively introduced a tax on safety. To avoid that tax whittling away the real value of our savings, we're being forced to take some risk. We often suggest you take that risk in a relatively safe way by going for solid international defensive stocks, paying good dividends. But there is no pretending that their dividends are entirely safe. As Jonathan Ruffer of Ruffer LLP points out, when governments are struggling, we have to watch for the "Will Sutton factor". Sutton was the bank robber who, when asked why he kept going back to the banks, replied "because that's where the money is".

So we shouldn't be surprised if we see raids on profitable companies by various governments. That doesn't make these firms a bad buy: buy into the likes of Edinburgh Investment Trust (LSE: EDIN), which is full of these kinds of shares, and you will earn 4.8%. That goes tax free to a 20% taxpayer and is taxed at 25% for a 40% payer. That's the kind of payout you can take a little risk for.

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Where else might one take risk right now?

The latest Merrill Lynch Global Fund Manager Survey offers a suggestion for the contrarian, although it is one I suspect many of you have taken already Japan. The survey shows that nearly all managers love global emerging markets, and hate Japan. Anyone in any doubt about how low expectations are need only look at the discounts on which listed funds trade, says Mizuho's Jonathan Allum. The US-listed Japan Equity Fund trades at 14% below its net asset value, indicating not just disdain, but "outright loathing". In Britain, most such trusts are on 13%-16% discounts.

Yet Japan may, in the words of Ruffer, "be less dangerous than it looks". It is only a question of time before the Bank of Japan is forced into providing some proper monetary stimulus, if only because Japan will at some point run into trouble financing its deficit. With tax revenues not even covering interest payments and social security bills, a few UK-style cuts won't do the job. So there will be no choice but to print money. That might not end well in the long term. But in the early stages of the inflationary cycle it will be extremely bullish (markets love inflation at 4%-5%). In the meantime, says Ruffer, Japan is "truly one of the few markets that is cheap in almost any environment". Sometimes it seems like that will last forever. But it won't.

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.