At the launch party for the Spectator’s business magazine, a banker introduced himself to me. He’d been wanting to meet me for ages, he said. He was a great fan – he read all my columns and had done well over the years out of taking some of my advice. I glowed with pride. Then came the fall. But, he went on, he had also lost a small fortune as a result of buying into the Japanese market – again on my advice – in 2007.
What did I suggest he did now? I shifted uncomfortably from foot to foot and prayed for the speeches to begin while the editor of a rival publication, irritatingly standing right next to me at the time, tried not to smirk too obviously.
It’s always horrible to feel responsible for other people losing money, but when it comes to Japan I really feel the pain: my own Isa is stuffed with Japan-related investments. So the fact that the Nikkei 225 was one of the world’s worst performing markets last year hasn’t exactly brought forward my retirement date.
So what did I tell him? That I was buying more. Japan is cheap in a way that no other developed markets are. A good 50% of Japanese stocks trade at less than their book value (the accounting value of their assets), for example. Dividend payouts are also rising. They have always been stingy, when they have existed at all, but over the past three years, the dividends offered by the biggest companies have been rising at double-digit rates.
And the economy isn’t doing badly at all. In the fourth quarter of last year, Japan grew at an annualised rate of 3.5% and in the first quarter of this year the numbers are expected to show that it grew at around 2.5%. Given that the best the US can do is 0.6% (and that number is bound to be revised down over the next few months), that looks pretty good.
Japan is currently the world’s fastest growing developed economy and given its links to Asia (twice as many Japanese exports go to Asia than to the US), it is likely to stay so.
Even more interesting is that fact that, after well over a decade of falling prices, Japan appears to have finally banished deflation. Food prices are rising (McDonald’s has eased the price of a Big Mac up from ¥250 to ¥280) as are energy prices.
But these obvious elements aren’t the only things that drove core inflation up to 1.2% year-on-year in March. Strip them out, says Jonathan Allum of broker KBC Financial Products, and inflation is still “mildly positive”. Better still, wages appear to be rising: the average base salary turned positive in November last year.
This is a very big deal. For far too long falling prices have put the Japanese off spending money (why buy something now if it will be cheaper tomorrow?) but if prices are rising – and workers have more money in their pockets – perhaps they will finally start to loosen their grip on their left-over-from-the-1980s Louis Vuitton wallets.
Already, says Christopher Wood of CLSA, Japanese consumers are expecting inflation to be running at 3.1% in 12 months’ time. This should do wonders for corporate pricing power (you can’t put prices up when people are expecting prices to fall but you sure can when they are expecting them to rise anyway) and for profit margins.
The other thing that might work to cheer up the Japanese consumer is the state of the property market.
Those who have placed very heavy bets on the UK property market on the basis that “we are a small island and demand is greater than supply” don’t like anyone to mention Japan. There, the long and totally insane bubble of the 1980s was justified on identical grounds. Then prices fell for 15 agonising years.
The good news – for Japanese homeowners if not for our own buy-to-let investors – is that they aren’t falling any more: residential land prices rose for the first time in 16 years last March.
Still, a lot of this has been true for some time and, as my new banker friend reminded me, it didn’t do us any good last year. Why might it now?
The answer is sentiment. Today most people hate Japan. Jonathan Allum points out that the week leading up to March 14 saw the biggest wave of foreigner selling since October 1987.
This is good news in the sense that the total capitulation of foreign buyers often marks a turning point for Japan. And so it has again. The point is that sentiment is beginning to turn. Right now very few investors have a stake in Japan. Soon they’re all going to want one.
So it’s best to get in before the rush – and the easiest way to do so is via the iShares MSCI Japan ETF (NYSE:EWJ).
First published in the Financial Times