An email arrived this week from a reader asking me why I keep going on about Japan. He has, he tells me, owned the same fund for 12 years and it’s still 25% below the levels where he bought it. All I can say to that is that it wasn’t MoneyWeek that suggested he bought it in the middle of Japan’s great deflation – and we certainly didn’t suggest he should hang on to it for year after miserable year.
On the contrary, we only started nagging everyone to buy Japan four years ago, in 2003; since then the country’s benchmark index, the Nikkei, has nearly doubled to 18,000. Admittedly, this year hasn’t been great – it’s only up 4.5% so far – and no doubt you could have made significantly better returns elsewhere, especially given the yen’s recent weakness (the Nikkei is up less in sterling terms, around 50% since 2003). But we’re convinced that for UK investors, at least, the best is yet to come in Japan.
This is partly based on the fact that Japan has pretty clearly moved out of deflation, its economy is growing faster than that of the EU or the US (over 4%), and its stockmarket is full of interesting opportunities. But it’s also because we expect the yen to turn soon. Japan’s currency has been held down for years by the Bank of Japan’s terror of raising interest rates too fast, and by the carry trade, in which everyone from housewives in suburban Tokyo to expats and every single one of the world’s hedge funds, has been participating (they’ve been borrowing cheap yen at around 2%, depositing it abroad at 5%-6%, and keeping the difference).
But as rates now start to rise, as foreign investors come to realise how good Japan’s prospects are and as risk perception rises and forces the nervous to shut down carry trades, the yen is likely to rebound. And once it gets started, it has a history of appreciating very fast (something to bear in mind if you are considering a foreign-currency mortgage). Go to Tokyo today and you’ll find that when you’ve got pounds in your pocket, everything appears to be practically free. Fancy a bit of grilled fish, some soup and a bowl of rice with pickles for lunch? Yours for £3. Dinner at the best restaurant in Tokyo’s best hotel? £50. A taxi across town? £5. This won’t last. So that’s why I keep going on about Japan: because I think that if you buy now, you’ll make money on the market, but you’ll make real money on the currency.
It’s also hard to see many other places to stash cash safely, given the risks out there. There’s the subprime crisis in the US, the possibility of interest rates going beyond 6% in the UK and the likelihood that China is to start exporting inflation. Then there’s the prospect of Goldman’s much-derided $100 oil call of last year finally coming true, of global liquidity drying up and of Metronet’s demise affecting the way the UK market values the support service firms involved in PFI projects. If you’re a worrier, you have a long summer ahead of you.