A few weeks ago, we wrote about Japan in MoneyWeek. (See Why you should invest in Japan now). We pointed out that while domestic consumption hadn’t improved as much as we had hoped over the last year, all the conditions for it to do so remained in place. We pointed to rising land prices, to a hint of inflation and to anecdotal evidence of rising wages. We also noted that much of the market is cheap, given how much restructuring has taken place in the corporate sector in the last five years.
Finally, we pointed out that anyone investing now would be sure to make some money – even if the stockmarket never perked up, the yen was unlikely to keep weakening, so there would at least be gains made on the currency. Since then, the yen has fallen even further: this week it has been trading at 21-year lows on a trade-weighted basis.
So how do we feel now? Like we want to be holding more yen. The G7 had a go at talking the currency up last Saturday – they are desperate for traders to stop betting on what the FT’s Gillian Tett calls the “never-ending yen decline”. Why? Because the size of the ‘carry trade’ (where traders borrow in yen to invest in higher yielding currencies) already appears terrifyingly enormous and the lower the yen goes, the more people get into the trade. Hence, as Tett puts it, “the lower the yen goes the greater the risk of a financial whiplash if – or when – it changes course”. And, of course, the more money will be made by those who turn out to have bought the currency at the bottom. We’re also even keener on the Japanese stockmarket than we were three weeks ago.
Back in early August 2005, James Ferguson wrote a cover story for us in which he urged us all to buy Japan. (See Japan’s new dawn.) At the time, the market had just hit a four-year high and his chart was telling him that it was about to break out (see the red circle on the graph). It did. Then, after a pretty spectacular run, it stalled for most of 2006. Now, however, the chart shows it being about to break out to the upside again. The Topix index is bumping up against 1,750, something it has done five times before in the last 15 years without actually managing to get beyond it. If it does this time, it will, says James, be “the big one”.
What might be the trigger for a real break-out? Watch Tokyo land values, says James: any official sign that they have moved upwards significantly and there will be a surge of confidence. The average move in a rally of this kind for the Japanese market is around 65%. You could say that this rally started back in June, but even so, that would leave a good 40% odd to go. We’ll get more on this from James next week, but in the meantime, it seems worth taking a punt on to me.