Japan is a perennial underachiever in global stockmarkets. That’s one reason I like it. It means that when it does well, it’s hard for most people to get excited about it.
While most eyes have been on China, or the Fed, or the German bund market, Japan has quietly been chugging higher. The Nikkei 225 index is now at a 15-year high, and the market has seen one of its longest winning streaks since the 1980s.
It’s not being ignored by any means. The general tone of media coverage is less sceptical than it was a couple of years ago, nearer the start of Abenomics. Plenty of fund managers will talk about how they like Japan.
But it’s hard to describe people as excited, let alone hysterical about it. Sentiment-wise, this isn’t a bubbly market.
Japan’s central bank is deseprate, and that’s driving up stocks
The recent gains have partly been down to a renewed slide in the Japanese yen, as the US dollar starts to recover from its recent weakness. And the prospect of more money printing – or at least, no imminent end to the qualitative and quantitative easing (QQE) programme – is certainly one reason to invest.
Both Britain and the US have stopped QE (for now at least). They’re talking about interest rate rises, even if they’re not doing anything. Europe has just begun QE, but it has a lot of political partners to juggle, so the central bank’s freedom to act is always going to be questionable.
Japan has no such problem. Arguably, the nation now has the most desperate central bank in the world. The Bank of Japan has decided that adopting a slightly unhinged approach to monetary policy is the only way to convince people it means business. Failure to buck the economy out of its long deflationary fugue is not an option.
Now, we don’t like buying anything solely on the basis of ample money printing, but there’s no point in denying it – QE (or QQE, or whatever you want to call it) pushes assets higher. And there is no sign of the Bank of Japan ‘tapering’ QQE at any point in the near future (most analysts don’t see anything happening until at least 2018).
So asset prices should keep rising.
But more importantly, QQE is not the only reason to buy Japan.
Three more good reasons to invest in Japan
1. Japan is seeing structural improvements
Companies are being forced to become more shareholder-friendly by new governance rules that kick in from today. If this works, Nicholas Smith of CLSA tells the FT, “it will be far more significant in pushing weaker companies to raise their game”.
Delivering shareholder value could mean everything from more share buybacks, to mergers and acquisitions, or raising cash by selling off assets. We’ll get an idea of how effective these changes are going to be over the next few months as more corporate results come in.
2. Inflation and consumer demand are picking up
Beyond that, there are signs of inflation and consumer demand picking up. Leo Lewis had a fascinating piece in the FT the other day looking at the rising price of second-hand luxury handbags in Japan.
The president of Kumehyo, the country’s biggest second-hand bag dealer, reckons that “the overall mental state of shoppers in Japan is gradually getting more positive”.
Apparently, Japanese women who trade in their bags are not selling to raise money for necessities. They’re doing so “to raise cash for a more adventurous purchases, and that seems to be supported by a feeling that their salaries might rise over the next year”.
3. Pension funds are buying stocks
Finally, pension funds are being encouraged to buy more equities. The Government Pension Investment Fund has already upped its allocation to stocks drastically. Now, reports the FT, three other big public pension funds are expected to do the same by the end of this year. This is a very big deal. As one analyst points out, many of these funds have “never invested in equities… this kind of leap is really a gamechanger”.
On top of all that, retail investors are being encouraged to buy stocks via their Nippon Individual Savings Accounts (similar to our own Isas).
Just over half of the financial assets owned by Japanese households are in cash or savings deposits. Around 17% is held in investments, “compared with 51.2% in the US.” So, as a Nomura spokesman told the FT, “the potential looks enormous if the US experience is any guide.”
So you’ve got improving corporate governance, a more promising economic backdrop, and potentially huge added demand for equities. Back that up with a never-ending money printing scheme and a stockmarket that isn’t overvalued in the first place, and hopefully you can see why we still think Japan is very attractive.
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