A few weeks ago I pointed to the fact that the dividend on Japanese stocks was on the verge of moving higher than the yield on Japanese Government Bonds (JGBs).
This has now happened: the cash returns on holding equities are higher than those on holding bonds. This may sound boringly technical but it really is worth noting.
Why? Because in the past every time this has happened (1998 2003 and 2005 in recent memory) the Japanese market has soon found itself in the grip of a massive rally and all the signs are that the same thing might happen this time.
Japan, unlike pretty much every other market there is, is cheap. Japanese stocks trade on a average p/e of around 15 times – about the same as those in the US on which everyone appears (bemusingly) to be so bullish, while according to Asian specialist brokers 48% of Japanese listed companies now have a market value below the book value of their assets.
Add it all up, say the analysts at Goldman Sachs, and Japan is now the cheapest it has been for over 30 years. Of course just because a market is cheap doesn’t mean it is going to start rising – for that to happen people have to notice the good in the market and start thinking about buying it.
The good news is that it looks like they are. The crossing of the dividend and the JGB yields was reported all over the place, and according to Jonathan Allum of KBC last week saw the Trust Banks, who run much of Japan’s pension money and who have been big net sellers of equities for the last four years, start returning to the market as buyers.
There’s also reason to think that individual domestic buyers might soon be back too. For years now they’ve seen better opportunities abroad than in their own markets: not only have they made better yields and capital gains out side Japan but with the yen falling they’ve made currency gains too.
Today, however, with western markets no longer a one way bet they’re getting lower returns for taking more risk and they’re taking losses on the currency too – the yen has been rising sharply. So why wouldn’t they bring their money home? It won’t take many of them to do so for the equity/bond yield signal that has worked so well in the past to work again.
First published in The Evening Standard