Japanese stocks are cheap, but book value doesn't tell the whole story
There's no doubt Japanese stocks are cheap. But some might not be quite as cheap as they appear at first glance.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Twice daily
MoneyWeek
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Four times a week
Look After My Bills
Sign up to our free money-saving newsletter, filled with the latest news and expert advice to help you find the best tips and deals for managing your bills. Start saving today!
We've long been keen on Japan at Moneyweek. Some readers will thank us for that; some will not. It depends when you bought.
We recently reiterated our positive view on the marketon the basisthat inflation is now more likely than deflation; it has one of the few sound banking systems in the world; the Bank of Japan appears ready to join in the currency wars; and it is cheap. Very cheap.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But I should strike one note of caution: I have been speaking to hedge fund manager Hugh Hendry who gives a slightly different view of the book value of some of Japan's biggest companies. It isn't, he says, always all it seems.
The problem is that corporate Japan (like much of Asia) is guilty of paying far too many "redundant quasi-state employees". It failed to take the tough decisions it needed to secure its long term survival. And that is a policy that is "slowly but surely eliminating all of the residual equity value in far too many businesses".
As an example, Hendry asks us to consider Hitachi. It has a new CEO who has committed to improving operational efficiency. That has made the market happy. But it shouldn't have.
"Let's leave aside for a minute the sheer opaqueness of its balance sheet (try asking management about that $18.5bn of other assets'), and let's ignore the fact that, whilst people might tout the company's fine cash flow record, its net debt in FY11 was much the same as it was FY03. That's despite a purported $10bn of free cash flow in the intervening period", he says.
Instead, let's look at the fact that the firm has 376,000 employees. That's clearly ridiculous, and it would seem obvious that Nakanishi-san, the new CEO, should get on with cutting it down (and raising operational efficiency and profit margins along the way). He needs to be "Hitachi's Jack Welch".
Let's say he has a go and, as Welch did, gets rid of 25% of the employees. "Based on the cost of Sony's recent restructuring it looks like it would cost Hitachi between $75,000 and $100,000 per redundancy. That's an implied liability of around $8bn. No one calculating the book value that makes Hitachi look cheap takes this in account. So book value is hugely over stated." Add this to the fact that the firm has "$25bn of existing net debt and pension liabilities" and says Hugh, "with a market cap of $29bn Hitachi isn't cheap. It's far too expensive."
There are a good many other companies in similar positions in Japan. That shouldn't be enough to put you off what is a very cheap market and if investors do come to believe that inflation is returning to Japan it won't make any difference to the performance of the market as a whole.
-
UK interest rates live: rates held at 3.75%The Bank of England’s Monetary Policy Committee (MPC) met today to decide UK interest rates, and voted to hold rates at their current level
-
MoneyWeek Talks: The funds to choose in 2026Podcast Fidelity's Tom Stevenson reveals his top three funds for 2026 for your ISA or self-invested personal pension
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
-
This isn’t the stagflationary 1970s – but neither is it the low-rate world of the 2010sOpinion With soaring energy prices and high inflation, it might seem like we’re on a fast track back to the 1970s. We’re not, says Merryn Somerset Webb. But we’re not going back to the 2010s either.
