Advertisement

Japanese stocks are still a bargain – investors should consider buying in

On a price/earnings ratio of 15.9, Japanese stocks are among the most reasonably priced in the developed world.

Consumers’ spending fell after the sales tax rose

“The Japanese stockmarket is like a toxic blowfish,” writes Leo Lewis in the Financial Times. It has repeatedly proved to be “delicious only to fanatics”, while being “absolutely riddled with danger”. 

Japanese equity connoisseurs were in for another nasty surprise this week. The Nikkei 225 index plunged by 4.5% on Tuesday. That caps a long period of underperformance. The Nikkei has gained 20% in five years, while America’s S&P 500 has jumped by 50%. At 22,600, the Nikkei is still far short of the 39,000 mark it reached in 1989 bubble. 

An economic shocker

Japan’s economy recorded its biggest contraction in five years in the fourth quarter of 2019, reports Akane Okutsu in the Nikkei Asian Review. An ill-timed sales-tax hike and a typhoon contributed to an annualised 6.3% plunge in GDP. The 2% rise in sales tax provoked a 11.1% tumble in consumer spending. 

Advertisement - Article continues below

“The sun may yet rise on Japan’s stockmarket,” writes John Higgins in Capital Economics. The underperformance of Japanese stocks has been a long-running trend, but the headline numbers can be deceptive. Since the start of 2010 the gap in cumulative returns between the US and Japan has averaged 6.3% annually. Recent underperformance can partly be blamed on a depreciating yen, which depresses returns in foreign currencies. An even bigger factor is simply the fact that American stock valuations have increased more rapidly. Japan’s post-crisis growth in earnings per share has actually been slightly faster than America’s. 

The result is that equities are cheap. On a price/earnings ratio of 15.9, Japanese stocks are among the most reasonably priced in the developed world. Those hunting for yield will be pleased by the 2.4% dividend yield, higher than America’s and comparable to that offered on major continental bourses. 

The rise of payouts to shareholders in Japan confirms that the days when the country’s managers cultivated a reputation for “penny-pinching and hoarding cash” are at an end, says Mike Bird in The Wall Street Journal. Prime Minister Shinzo Abe has ushered in corporate governance reforms that have made shareholder value a priority. The result is that buybacks surged 48% in this fiscal year. 

Corporate Japan can well afford to be generous. Non-financial firms are “perched atop” a ¥285trn (£2trn) cash mountain. This is a market characterised by “low foreign ownership, relatively cheap valuations, and an increasingly shareholder-friendly policy”. 

Investors with a “long time horizon” should ignore the short-term turbulence and “consider a significant allocation to Japan”. 

Advertisement
Advertisement

Recommended

Visit/investments/stockmarkets/japan-stockmarkets/601139/more-mammoth-stimulus-in-japan
Japan stockmarkets

More mammoth stimulus in Japan

Japan's prime minister, Shinzo Abe, has unveiled a mammoth stimulus plan worth 20% of GDP. 
9 Apr 2020
Visit/518031/japan-has-seen-plenty-of-false-dawns-but-this-time-its-for-real
Stockmarkets

Japan has seen plenty of false dawns – but this time it’s for real

Japan suffered one of the most spectacular bubbles in financial history. But today, the market is so cheap that it’s practically the opposite of where…
14 Nov 2019
Visit/515761/japan-ignore-the-rugby-and-buy-the-stocks
Stockmarkets

Japan: ignore the rugby and buy the stocks

Japan won't win the Rugby World Cup. But its stockmarket could prove a winner.
27 Sep 2019
Visit/512156/japanese-stocks-when-will-we-see-nikkei-39000
Stockmarkets

Japanese stocks: when will we see Nikkei 39,000?

Japanese stocks remain far below their bubble-era highs. But if reforms continue, the market could finally set a new record within a decade, says auth…
2 Aug 2019

Most Popular

Visit/investments/commodities/industrial-metals/601401/money-printing-infrastructure-base-metals-copper
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020
Visit/economy/eu-economy/601422/heres-why-investors-should-care-about-the-eus-plan-to-tackle-covid-19
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Visit/investments/funds/601385/in-support-of-active-fund-management
Funds

In support of active fund management

We’re fans of passive investing here at MoneyWeek. But active fund management has its place too, says Merryn Somerset Webb.
25 May 2020