“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.
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“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”.
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