Japan: still worth waiting for

Regular readers will know that we have been keen on the Japanese stock market for far too long. It has been one of the cheapest markets in the world for a while now (if not the cheapest), and we have been waiting for a catalyst to make it start moving.

Back at the beginning of this year it looked like we might have one. “Japan catches the Bernanke religion”, said Edward Chancellor in the FT, above a piece which outlined how the Bank of Japan (BOJ) had put out a “surprise statement” clarifying its “commitment to overcome deflation” in favour of “price stability”, something it then defined as inflation at 1% a year. It then stepped up its version of quantitative easing by ¥10trn.

Finally, it looked like Japan had decided to stop being the victim of everyone else’s currency degradation (a strong yen is always bad for Japan’s market) and to join in the currency wars instead. The yen tanked (down 7% against the dollar in the first quarter of this year), foreign investors piled in and stocks rose by a good 20%. We were happy. But as is always the case with Japan, we weren’t happy for long.

At the end of March, the eurozone crisis returned with a vengeance. The yen – thanks to its safe haven status (relative to everyone else at least) – soared. It was, as James Mackintosh points out in today’s FT, the only one of 16 major currencies to fall against the dollar in the first quarter; it became the only one to rise since (up 4%).

And the market? It has proved to us all yet again that the only thing it cares about is the yen. Yesterday the Topix hit levels “seen on only 11 days in the past four years and before that not since December 1983”. Worse, “even taking into account dividends and inflation, ¥1,000 invested in 1985 has made exactly nothing”. It isn’t quite as bad as it sounds, in that UK investors will have made a turn on the currency, but it isn’t that great either. So what next?

Japan’s fundamentals are good – the balance sheet recession there at least is over. It is still the cheapest market out there. It is also worth noting that the BOJ is still targeting 1% inflation, and it is under a good amount of political pressure to make sure it hits its target. It has to keep going with its asset purchase programme.

So while some of you will mock, I know, we will keep waiting. After all, we aren’t fund managers and neither are you – we don’t have to report quarterly gains, we just have to make real returns over the long term. That’s something we still think we will do in Japan.

For more on this, see our latest cover story on the matter here: Why Japanese stocks are set to soar, and a more recent piece from our markets pages here: This takeover boom will light a fire under Japanese stocks.