An interesting little note from Jonathan Allum at Mizuho arrives. He’s been trying to tell people that they really should invest in Japan for months now.
Some of his would-be clients have been shocked that anyone in “apparent possession of the majority of his faculties” could make such a self-evidently absurd suggestion. But even those who have become convinced that there might be a half decent case for investing in Japanese shares (they’re cheap) have still sent him away on the basis that they can’t see what the “catalyst” for change will be.
The point they all make is that ignoring Japan for the last 20 years has been the right thing to do regardless of the odd 20-40% rally here or there. The only reason to return – and expect to make returns that don’t almost instantly evaporate – is if it can be clearly shown that something has changed, that there is a catalyst.
So what has to change? Most foreign investors have long thought that it has to be something to do with Japan’s system: they want to see signs that its financial and economic system is moving closer to that of the free market capitalism they like to think exists in the US and the UK.
So what gets them really excited is hostile takeovers, shareholder activism and the like. But, while this theme has worked in the past to pull money into Japan, it doesn’t really make much long-term sense, says Allum.
“The truly distinctive feature of Japanese capitalism during its “lost decades” was not its poor standard of corporate governance (check out most Asian nations) or its disdain for hostile takeovers (check out most European nations). Instead it has been deflation. And if anything is to be a catalyst for a Japanese bull market, it is the arrival of inflation.
The problem, however, with waiting for a catalyst to be confirmed (so say for example for the CPI to be over 1% on an annualised basis for more than nine months) is that the market doesn’t bother with the waiting. Markets are forward looking and as such they deal “not with established facts but with possibilities”.
And there are good reasons already (including the Bank of Japan’s volte face on quantitative easing and the falling yen) to think that Japan has already emerged from “the Big D”. That’s a good reason to be a buyer rather than a seller: it’ll be a while before anyone can be sure that deflation is dead in Japan but the TOPIX has already risen 20% since it bottomed on 24 November.
No doubt the many people Allum has been meeting with now rather wish they had spent less time worrying about catalysts and more time appreciating fundamentals.