Historically, investors in Japan have swung between excessive bullishness and irrational gloom, heralding opportunity for contrarians. So the current excessive pessimism makes the market worth a look.
GDP rose by 2.1% in 2007 and accelerated by 0.9% in the fourth quarter, a 3.7% annualised rate, helped by exports and capital spending. The latest data suggest that “as long as the whole world doesn’t go over the edge”, Bank of Japan governor Toshihiko Fukui’s expectation of continued, modest growth is still valid, reckons David Cohen of Action Economics.
Residential investment has been hampered by the botched introduction of a new building code, but is now recovering; it could add over 0.5% to growth this year, helping to offset a smaller contribution from external trade as the global economy slows, says Capital Economics. Business confidence is still relatively high, confirming that “corporate (and financial) Japan is in good shape to weather a global downturn”.
Employment also continues to rise, although this has yet to fuel an increase in wages and hence consumption. But inflation is now positive yet low, and inflation ought to encourage consumption as households have hitherto postponed spending in anticipation of falling prices. Yet “traders appear to assume the imminent return” of stagnation, rather than recognising that Japan is five years into recovery, says Martin Hutchinson on Breakingviews; the broad Topix index has lost about 20% from its high.
The market is now “far too cheap”, says John-Paul Temperley of Martin Currie. The dividend yield on equities has eclipsed ten-year government bonds yields and stocks are on a historically low p/e of under 16. Peter Tasker of Dresdner Kleinwort has noted that 60% of small caps were trading below book value. Share buybacks are now on the rise; throw in the likelihood of the undervalued yen appreciating against weakening sterling, and investors’ current attitude to Japan, as Hutchinson says, is currently one of “irrational indifference”.