11th January 2012
It's been a dismal few decades for the Land of the Rising Sun. And now, not only are there natural disasters to contend with, but a global economic and eurozone debt crisis to pile on the bad news.
China replaced Japan as the world's second-largest economy in the summer of 2011. While not unexpected, for a country that prides itself on an innovative, successful economy, this is a severe blow.
But does this spell another bout of poor performance for investors?
Experts have repeatedly predicted a recovery and return to sustained growth in Japan over the years, but so far this remains to be seen. According to Invest with an Edge, there are, in fact, many reasons to avoid Japan, including that the yen was very strong in 2011, which is "bad news because it makes Japan's exports relatively more expensive. And exports are a big part of the national economy…" A large chunk of Japanese exports go to Europe, and given the problems in the region, this won't help.
Yet can it really all be bad? After all, at one stage Japan seemed to be decades ahead of the rest of the world. In the 70s and 80s, the country was seen as the world's technological and industrial leader. It rapidly became the second biggest economy – but is now battling huge debt. Japanese sovereign debt amounts to a staggering 225% of the country's GDP.
But ignoring Japan's sinking index, could there still be a recovery? Perhaps the country is one where investors should turn a blind eye to an index's torrid performance, and focus on long-term fundamentals. While Japan has been battling a more of debt and sluggish growth for years, with fears the West will head the same way, are there still lessons to be learned and opportunities for profit?
Michael Wood-Martin, manager of the Henderson Japan Capital Growth fund, says: "There is much misconception with regard to the performance of the Japanese stockmarket. What investors tend to omit when looking at the returns from stocks is to incorporate the currency effect, which has been marked as the yen has risen against virtually all other currencies. Granted the returns from the S&P have been better but Japan, when currency adjusted, follows a similar trading pattern to developed markets. So, for example, although the index is below the depressed low of 2003 when global markets bottomed, in US$ terms the index is markedly above this level at present.
"Japan may not be the most exciting of economies especially given its geographical location nestled close to vibrant Asia but in comparison to western counterparts the country is looking increasingly attractive.
"The economy, much maligned and almost forgotten about, can offer a clean bill of health having completed its balance sheet restructuring whilst offering a large liquid stockmarket with companies which are typically cash rich and increasingly investor focussed."
Which index should you rely on?
Wood-Martin says: "The Topix index is a well established index which in recent years is being superceded by the MSCI Japan index which has a fewer number of stocks but giving a close representation of the overall index. Both these indices are geometric and both have the full validity of being benchmark indices – which one is used is largely a matter of choice. Topix has a much higher number of stocks and a much longer small cap tail. The Nikkei 225 is an arithmetic average and is not widely used as a benchmark index but is referred to in new bulletins and other such announcements."
Japan is well known for reaching economic success through cheap, innovative, efficient manufacturing. They may have competitors in India and Taiwan, to name a few, but they are capable of rising to the challenge, say some financial pundits.
"False dawns and Japan have become synonymous for investors," says independent financial adviser Bestinvest. "But we believe Japanese equities have been unduly punished and that the market is well placed for a rally."
So what are the positives, according to Bestinvest? These include: Japan's banks being among the best capitalised in the world; a strong currency treated as a safe haven by investors; healthy company balance sheets – the market as a whole is trading at a very low valuation, and reconstruction post the tsunami, which will benefit Japanese companies.
After all, Buffett is keen…
Bloomberg reports that billionaire investor Warren Buffett is unfazed by the recent scandal at Japanese camera maker Olympus Corp and is looking for investment opportunities in the nation's companies.
"We're looking for companies that have some kind of sustainable competitive advantage," Buffett said. "The fact that Olympus happens here or Enron happens in the U.S. doesn't affect our attitudes at all."
"There are lots of opportunities in Japan," Buffett, 81, said in Iwaki city, adding that the earthquake hasn't changed his view on investing in the country. He said he is interested in "businesses that will be around for many, many decades."
There are certainly lessons to be learned from Japan. The nation has had decades to come to terms with its decline, and focus on tackling this efficiently, rather than the panic spreading in the West. After all, the country remains one of the most prosperous on earth, with a strong welfare system, high life expectancy and low unemployment, with hardly any crime. So is it time to take a punt in the hope its sun will rise again?
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