It was 17 January 1990 when I experienced the worst snow storm of my life. Stuck in Newark Airport, New Jersey, I spent a night curled up on an extremely uncomfortable airport bench. My friends couldn’t get to the airport to pick me up, and it wasn’t even possible to get to one of the nearby hotels.
But at least I had a good book to keep me company. So as not to waste the entire night cursing the weather, I had picked up what back then was a much-discussed bestseller among finance books.
‘The Sun Also Sets’, a textbook on Japan’s seemingly unstoppable conquering of the world’s economy. As you may well remember, back then everyone believed that America and the rest of the world would soon be owned by Japan Inc., which was the fastest growing major economy on earth at the time.
Remember the golden days of Japan?
It was the time when Japanese investors had just shelled out an incredible billion dollars for Pebble Beach, the legendary golf club in California.
American auto workers publicly smashed Japanese-built cars into bits and demanded Washington protect GM’s, Ford’s and Chrysler’s home market from the Japanese carmakers’ invasion.
Property prices in Japan were higher than anywhere else in the world, and the ground on which the Emperor’s Palace in Tokyo stood was allegedly worth more than all of California.
Oh, and Donald Trump wasn’t a reality television star at the time. He was a bankrupt!
How times change!
An intelligence gathering trip to Tokyo
Having just spent a week in Tokyo, I had a chance for a casual survey of the Japanese economy.
Not that anyone could truly analyse a country of 130 million by simply spending a few nights in the capital. But the more one travels, the more trained one’s ears and eyes become to sense a place’s vibe.
In my years of criss-crossing the globe, I’ve learned to quickly pick up which places are worth further investigation…and which are better left alone.
A bear market that must have worn out even the most fervent bulls
It was on the last trading day of December 1989 that the Japanese stock market reached its all-time high of 38,957. Since then, it has fallen as low as 7,607.
At last count, it was back up at 12,439.
Ever since the Japanese market peaked, hardly a year has gone by without at least one highly visible Japan ‘expert’ claiming that the market was about to turn.
Except for a few temporary rallies, nothing ever became of it. It’s now been nearly 16 years that Japan entered its bear market.
Think back to what you did or where you were in 1989, and then imagine that your portfolio has lost value ever since!
Are these the first signs of a lasting turnaround?
The Japan bulls are currently back in force. Not only has the market risen some 64% since its April 2003 low, which makes it much easier to give an investment case some credibility (after all, most investors like to extrapolate trends). There are also elections coming up on 11 September, with a credible prospect of some serious economic reforms being just around the corner.
Even the all-important property prices are reviving, at least in central Tokyo. You have to know that in Japan, consumer spending depends just as much on the value of peoples’ properties as in the UK or the US.
So, has the time finally come to jump on the bandwagon and to buy into Japan?
I’d be foolish to deny that both the elections as well as a boost to property prices could also provide some further lift for the stock market. But after watching the Japan gurus get it wrong most of the time during the last 16 years, I’d be three times as cautious when it comes to investing in Japan.
It doesn’t even take an economist’s number crunching skills to quickly find out that Japan doesn’t quite function the way our Western economies work. Our way of thinking might simply not work, when it comes to getting one’s head around the issues that are relevant to the country.
The length of the crisis should make anyone think twice
Japan is still set in the rigid ways dictated by Japanese culture and tradition. Most firms still put life-long employment ahead of profits. Corporate restructuring is a painfully slow process, leading to companies turning around slower than they would if they were based in a Western country. There is, after all, a reason why Japan is still riddled by the same problems that it was struggling with back in the early-1990s.
The country does have its strengths. For example, Japan last year won more new patents than any other country on earth. But a closer look at the figures reveals that these are mostly patents for electronics. In this particular sector, it’s relatively easy to register myriads of patents for what is often only a tiny detail of a much larger product. And electronics is a mature market with low margins and cut throat competition. Hence, the number might look impressive, but in economic terms it’s much less significant.
Where Japan is lagging, are patents for drugs. That’s where (despite Vioxx) plenty of money is made. But Japan’s presence in the drugs industry is well below what one should expect given that this is the world’s 3rd largest economy.
Hold tight till the market experiences another plunge
These are an outsider’s views of Japan. I don’t speak a single word of Japanese, nor can I claim to have run a business there or travelled to its farthest corners. But walking through the department stores of Tokyo’s most important quarters, reading up on the local English-language and speaking to Japanese friends I couldn’t help but get a feeling, that things are changing ever…so…slowly…in Japan.
It’s a nation of immense wealth, with one of the world’s most fascinating and sophisticated cultures. But personally, I’d only buy a Japanese fund next time the country is making front page headlines for its problems.
With Japan’s alleged turnaround currently being in the front section of magazines and newspapers everywhere, I cannot help but wonder if the 64% rally during the last 28 months will turn out to be as good as it gets, at least for the time being.
RegardsSven Lorenfor The Profit Hunter Files
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