Japan: ignore the rugby and buy the stocks

“Few folk expect Japan to win the Rugby World Cup that kicked off in Tokyo last Friday,” says Ian Cowie in The Times. But the country’s unloved stockmarket could well prove a winner. The scrum between American and Chinese trade negotiators has done equities in the Land of the Rising Sun no favours. At just over 22,000, the country’s Nikkei 225 benchmark is still far from regaining the 39,000 high it achieved at the height of the 1989 bubble. Shares in the broader Topix index are down by more than 10% over the past year.
Low expectations…
The dampening effect of the trade war saw Japan’s exports fall 8.2% year-on-year in August, the ninth straight monthly decline. Those numbers generated plenty of doom-laden headlines, but the reality is more positive, says Jonathan Allum in The Blah! newsletter. The latest figures beat consensus forecasts of a 10% plunge and the declines finally appear to be bottoming out. The Japanese economy has actually been exceeding expectations this year.

Plans to increase the consumption tax by 2% in October are projected to “tip Japan into economic contraction” in the fourth quarter, Kwok Chern-Yeh of Aberdeen Asset Management tells Mark Atherton in The Times. But sluggish recent consumption growth has a silver lining, writes Robin Harding in the Financial Times. It suggests that shoppers are not “rushing to beat” the forthcoming tax hike as they did in 2014.
That could save the economy from any nasty shocks in the fourth quarter. With unemployment hitting a 26-year low last year, there are reasons for optimism about the outlook for wage growth and consumption in the medium-term.
… should be surpassed
Fans visiting for the World Cup will deliver the economy a $4bn-plus windfall, says William Pesek in the Asia Times, which should add further fuel to the country’s fast-growing tourism industry.
Reforms to the once incestuous world of Japanese conglomerates is boosting shareholder value. Japan has become far more appealing to income investors. On a dividend yield of 2.6%, the country’s stockmarket now returns more than America and is not far behind many European indexes. Dividend cover is also better than in the West, Richard Aston of CC Japan Income and Growth trust tells Vicky McKeever in CityWire. “More than half of the companies in both the Topix and Topix500 have net cash on their balance sheets.” The equivalent figure for the FTSE All-Share is just 29%.
Three decades of disappointment have caused many foreign investors to abandon Japan, but they are missing out on one of the developed world’s most reasonably priced markets. On a price/earnings ratio of 13.9 Japan’s stocks look cheaper than even the historically bombed out UK’s. A price-to-book ratio of 1.1 also suggests that this is one of Asia’s more promising pockets of value. MoneyWeek’s favourite Japan plays include the Baillie Gifford Japan Trust (LSE: BGFD) and the CC Japan Income & Growth Trust (LSE: CCJI).