Why a £2,000 watermelon is great news for Japan

Yesterday, a watermelon sold at auction in Japan for £2,045.

Like many things in Japan, that sounds mad to an outsider. But apparently the Japanese highly prize unblemished fruit, and this is the sort of thing you see at the first sale of the season.

The price paid was nearly £300 higher than at the same auction last year, reports The Daily Telegraph.

Why should you care as an investor?

Because as David Fuller notes on FullerTreacymoney.com, “these melon prices are… a sign of increasing confidence”. Not to mention a sign of inflation (though with melons going for two grand apiece, you might wonder why Japan would actually want inflation).

But for anyone who might be worrying that this is a sign of ‘irrational exuberance’ too, don’t. It’s still nowhere near the record £3,800 paid in 2008.

Watermelon prices have a long way to go in Japan. Just like the rest of the economy.

Why the Japanese market has stalled

Japan has enjoyed a surge of popularity with investors over the last few years, ever since Shinzo Abe became prime minister (for the second time). But so far, 2014 has been disappointing in terms of stock market performance.

At a time when the US just can’t stop hitting new record highs, Japan’s Nikkei index has remained mired between the 14,000 and 15,000 mark. Year-to-date, it’s fallen about 6% or so.

Meanwhile, the once-seemingly endless tumbling of the yen seems to have stalled at around 100 yen to the dollar.

So what’s going on?

There’s the basic problem that the market is up around 100% over the past 20 months or so. That sort of pace is always hard to sustain. Neither bull nor bear markets move in a straight line.

There’s the problem of the consumption tax. In April, Japan raised its equivalent of VAT from 5% to 8%. When you think about it, that’s actually quite a big jump – you’re raising the level of the tax by 60%.

The government did something similar in 1997, and lots of pundits blame it for scuppering a nascent economic recovery. I think they’re wrong in this case – Japan’s banking system was still knackered in 1997, but that’s not the case now. And the economic data suggests that things are picking up nicely despite the tax hike.

Finally – and probably this is the real issue – investors got money-printing fever. The Bank of Japan is printing an incredible amount of money. As Ambrose Evans-Pritchard points out in a very bullish article in The Daily Telegraph, the Bank of Japan’s balance sheet will reach 70% of Japanese GDP by March 2015. That’s three times as large as the Federal Reserve’s.

In other words, using quantitative easing (QE), the Bank of Japan (BoJ) is pumping more money into the system – compared to the size of its economy – than any other country in the world.

Yet, for QE-obsessed investors, it’s not enough. They’d hoped to see the BoJ do even more.

Now, I can’t blame investors for losing faith in Japan’s efforts to push economic growth higher. After all, losing faith has been the correct choice for a couple of decades now.

But there are clear reasons to believe that they’re wrong in this instance. Japan has turned a corner intellectually. There is now conviction that reflation is the way to go. So if it shows signs of faltering, I think we can be confident that the central bank will act.

And so far, the only reason the BoJ hasn’t upped the QE is because what it’s doing seems to be working. Inflation is picking up (and not just for watermelons – clothing chain Uniqlo is hiking prices by 5% across its range).

The Japanese stock market could be due another boost

As Jonathan Allum of SMBC Nikko notes, those who were fretting that the BoJ isn’t doing enough are now gradually throwing in the towel. They’ve started to look at the economic data, and accepted that even more QE simply isn’t justified. And if the economy is actually getting better, well then – Japanese stocks are worth buying.

More than that, there could be more excitement to come. Abe is keen to encourage the Japanese to stick a lot more of their savings in the stock market. The huge government pension fund is going to be allowed to invest more in stocks. And Japanese individuals are also being encouraged to invest via a tax-efficient savings vehicle very similar to our individual savings accounts (Isas).

One Japanese investment bank, quoted by Evans-Pritchard, reckons the Nikkei will get to 18,000 by October as a result of all this added potential investment. As Evans-Pritchard puts it, “there are no one-way bets in global finance, but Japan’s stock market comes close”.

We’ve recommended plenty of Japanese funds and stocks in the past .

But if you’re looking for the best bargains in Japan (and why wouldn’t you be?), you have to read this week’s issue of MoneyWeek.

My colleague David C Stevenson picks out his favourite way to play Japanese small-caps, which are some of the cheapest stocks on the planet right now. If you’re not already a subscriber, you can get hold of your first three issues free (and get access to David’s piece) by clicking here.

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  • Delta

    What do you think will happen to the sterling/yen exchange rate?

  • mikeT

    Has Japan’s QE actually found its way into the real economy or has the “wall of money” just been deposited back with the BoJ (as in the US)? I do not know. Anyone?
    While more equity investment by pension funds and ISa-like savings could well be bullish for stocks, the eventual unwinding of QE must surely hang over this (and all markets)? My understanding, from the above, is that QE money has stayed firmly within the financial system: it is not directly responsible for financial asset inflation. Rather, lack of JGB supply has forced normal investors (ie pension funds) into alternative (corporate bonds, equity) and ever-riskier (junk, emerging markets) investments in search of yield. When normal supply resumes, these alternative investments will be dumped.
    The question, of course, is when. What happens in the US, where the taper and “normality” is closer at hand, will be instructive. On that theme, UK QE stopped some time ago (I think). Does anyone know whether there has been an “unwind”?