Hang on for a weaker yen

Japanese stocks have been cheap for years. But with the Bank of Japan on a printing spree, investors who have kept the faith may soon be rewarded, says Merryn Somerset Webb.

We've been telling you here for rather longer than I like to admit that you should have a holding in Japanese equities. Why? Because they are cheap. And things that are cheap usually revert to some kind of mean in the end.

The problem, of course, is that, while we can tell you for almost certain that this will happen (and that when it does you will make money), we can't tell you when it will happen. That means that you could be holding your cheap Japanese equities for a long time (as I have been) and in the process incurring substantial opportunity costs.

The last few years haven't been all bad (the strong yen has compensated British holders of Japan for a good part of their stockmarket losses and some funds have done extremely well), but they haven't been particularly good either.

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So what might make this change? I've offered various possibilities over the long years in which we've been hanging on to the Japanese dream, but the obvious one is a weaker yen. The weaker the yen, the cheaper Japan's exports look and the better its many exporting companies should do. It is a simple equation, but one the market has always reacted to when the yen falls, the market rises (usually by more than the yen falls).

With this in mind there is good news and bad news. The bad news is that a good many people think Japan is insolvent. Kyle Bass thinks that in the last two months Japan has "crossed a rubicon". He notes the deterioration in Japan's balance of trade something the "resurgence of Chinese nationalism" can only make worse.

Add that to the secular decline in the population; to falling GDP; to one of the largest debt burdens in the world; and to what looks like a shift away from Bank of Japan independence and it is obvious, says Bass, that after the upcoming election on 16 December, politicians will be taking control of monetary policy.

When they do they won't be tightening it. Instead, we can expect huge rounds of money printing, followed by "a bond crisis and a massive deterioration of the yen".

I don't buy all of this. I've written several times on our blog about the unrecognised financial strength of Japan. It has a fully functioning and solvent banking system, for starters.

But it is certainly the case that monetary policy has taken centre stage in the election campaign over the last few weeks. It is also true that the yen has fallen, bond yields have risen (so prices have fallen) and in response share prices have risen too.

If the new government is of a loose money mind (and all the signs are that it will be), we might, just might, be getting closer to the good news the day when a falling yen means that long-term holders of Japan finally get some of the returns they have been waiting for.

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.