Merryn's Blog

Japan has its problems, but it's still a buy

Japan has its problems, it's true: it’s mired in debt and the yen is looking shaky. But it's cheap, and is still worth buying and holding for the long term.

This Japan business is beginning to get a bit tiring. As soon as you think the authorities are getting a grip, they instantly lose it.

I was thrilled when the Japanese electorate took a stand and elected a non-LDP politician as PM last year, ending half a century of very conservative one-party government. But the knives have been out for poor Yukio Hatoyama for months now (no great surprise given that he has been commanding popularity ratings of under 20%) and yesterday he gave in and resigned.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

He had, he said, tried to change politics so that the Japanese people would be the driving force behind change. He failed.

His replacement is likely to be Naoto Kan currently Japan's finance minister. He'll be the fifth PM in four years, thanks to a hugely change-resistant political system that gives its PMs very little in the way of real power.

Advertisement
Advertisement - Article continues below

The good news is that Kan is seen as a reasonably good bet, in that he might have a go at dealing with the budget deficit (he is keen on putting up consumption tax). He also appears keen on a weaker yen, something that might stimulate both exports and a hint of much-needed inflation. However, the bad news is that he has a horrible job to do which, given how Japanese politics tends to work, he won't get long to take a stab at.

The Japanese deficit is now around 10% of GDP with under half of government spending currently covered by tax revenue. Gross debt, as is often reported, is more than 200% of GDP. It's a number that makes even the UK's horrible national debt look almost manageable.

However, if Hugh Hendry is right, the current level of debt might be the least of Japan's problems.

When I interviewed him a few weeks ago he said that he feared for the yen. The general consensus is that the yen is too expensive at the moment and if you look at it on a purchasing power basis, that is certainly the case. But that doesn't mean it can't get more expensive.

Imagine, says Hugh, that things really do go horribly wrong in Japan. Take Japanese pension companies. They have yen liabilities, but are often heavily invested abroad. But if the value of their yen assets suddenly falls (as China collapses and exporters drag down the Nikkei for example), they'll have to repatriate assets to fill the gaps. But in doing so they have to buy yen. That forces up the yen, which hits exporters further, kicking off a vicious circle of collapsing asset prices and a rising yen.

Right now, a US dollar costs you about 90 yen. Hugh reckons we'll see it costing a mere 50 yen before China's drama has played itself out. Add that to the fact that the Japanese have had no nominal GDP expansion for 20 years and you would have to be "insane" to invest in Japan.

This is scary stuff and it is absolutely true to say that Japanese industry is heavily leveraged to China. But I'm not quite ready to turn bearish on Japan yet. Our hopes lie not so much in the possibilities inherent in its commercial links with China, but in its cheapness and in the possibility that domestic consumption will soon improve.

Advertisement
Advertisement - Article continues below

The market as a whole is trading on a price-to-book ratio of a mere 1.2 times (although as the cynics always say, stuff is always cheap before it goes bust). That, as our own Simon Caufield notes is half the price of the S&P, and the cheapest it has been during its 20-year bear market.

I still think Japan is worth buying and holding for the long term.

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
Visit/510135/trade-war-ceasefire-boosts-stockmarkets
Economy

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020