Japan's Prospects

[Guest_FaFa!_*]

I've seen a bunch of reasonably bullish articles on Japan recently and keep meaning to post. Problem is I keep reading and reading and never get round to it. Saw this article on the FT and thought it would be worth post for comment as it is fairly typical of what I have seen

http://www.ft.com/cms/s/a00fade8-3f4d-11e0-8e48-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fa00fade8-3f4d-11e0-8e48-00144feabdc0.html&_i_referer=http%3A%2F%2Fftalphaville.ft.com%2Fblog%2F2011%2F03%2F01%2F500721%2Fjapans-big-comeback%2F#axzz1FDY5EhCf

Stop looking in the rear-view mirror at Japan

“What most likely happened was pedal misapplication.” So concluded an official of the National Highway Traffic Safety Administration, the US body that has just published its report on the spate of accidents involving Toyota cars.

This time last year, remember, Toyota had to make an 8m vehicle recall. American politicians were in full cry. The families of accident victims gave emotional testimony at congressional hearings, and Toyota’s CEO flew to the US to apologise in person.

The media was quick to draw harsh parallels between the decline of Toyota and the decline of Japan. Now it turns out that Toyota wasn’t declining at all. The problem, according to NHTSA, was that “the driver stepped on the gas rather than the brake or in addition to the brake”.

Has the global investment community been making a similar error about the decline of Japan?

Underweighting Japan to fund an overweight position in emerging markets has been a popular strategy for several years. The last time you were hurt by not owning Japan was in 2005, which is a lifetime ago in the fickle mind of Mr Market.

Over the longer haul, Japan’s 20-year bear market has extinguished investor confidence and created a number of damaging myths that can be used to justify a pessimistic stance. On closer examination, though, Japan is not as uniquely hopeless as its reputation suggests.

The first myth is that Japanese companies have no growth potential. In fact, since the peak of the IT boom in 1999-2000, the Topix index has managed earnings per share growth of 200 per cent – much better than most other developed markets and only narrowly beaten by the Shanghai Composite.

Japan’s nominal gross domestic product has indeed been stagnant, but the profits of listed Japanese companies are increasingly driven by global conditions.

Second myth – Japan has a huge demographic problem that will ultimately blow up the bond market. The reality is that Japan has already been greying rapidly for the past 20 years, a period in which bond yields, far from rising, have fallen to their lowest levels in recorded history.

True, the household savings ratio has plunged, but the savings in the corporate sector have risen dramatically as companies invest less. So the economy as a whole still churns out a savings surplus. There is no reason for this to change.

By contrast Europe and China are at a much earlier stage of their demographic crunch, and appear worse-equipped to handle it. In Japan, 20 per cent of people over 65 years old work. In most European countries the proportion is less than 4 per cent.

Third myth – Japan has appalling corporate governance. There is indeed room for improvement, but the recent surge in management buy-outs and other corporate actions (such as the Nippon Steel-Sumitomo Metal merger) suggests change is in the air – though in the usual gradualistic Japanese way.

In contrast, investors who have bought the emerging market story have to tolerate murky deals – such as the 40 per cent of revenues that China’s top maker of the alcoholic spirit moutai reserves for Communist party officials – as part of the economic landscape.

Last myth – the global credit crisis has accelerated the marginalisation of Japan. Yes, in terms of local currency GDP, which is how economic performance is usually discussed, Japan was indeed a big loser. It took an 8 per cent hit to output – the largest of any country in the Organisation for Economic Co-ordination and Development – of which it has subsequently recovered about half.

However, look at the picture in common currency terms and the conclusion is very different. Since the subprime crisis kicked off, the yen has risen 33 per cent against the dollar, 48 per cent against the pound, and 35 per cent against the euro.

Compared to other developed countries, as opposed to the emerging world, Japan’s global presence has grown, not fallen. The yen is a safe haven, and profits in yen – earned by companies and investors – are more valuable than ever.

Given all this, why have Japan’s equity markets been such poor performers for so long? The answer is simple. Japanese stocks were astonishingly overvalued at the peak of its 1980s bubble – more overvalued than the US market in 2000 or Shanghai in 2007.

The de-bubbling process inflicted huge damage on the corporate sector, from which it was finally recovering when the subprime crisis hit.

Today Japan is no longer an expensive market; it is averagely priced or very cheap, depending on which metric you use. Investors should stop looking in the rear-view mirror and make sure to avoid pedal misapplication.

What concerns me long term is, of course (like every other country), the debt. In terms of Japan's debt what I am finding it hard to get my head around is the level of government debt, level of private debt and how each of these are financed. Whilst the Japanese govt debt to GDP ratio looks eye watering, a key factor is how this debt is funded and what levers the govt can reasonably push should the situation worsen? I am also interested in comments on the article and what people make of the "myths" listed.

Edited March 1, 2011 by FaFa!

[rantnrave]

Hasn't Japan suffered the humiliation of a debt rating downgrade?

[Guest_FaFa!_*]

Hasn't Japan suffered the humiliation of a debt rating downgrade?

They have indeed, but this has not had much of an effect on Japanese financial markets. Article here argues they are misreading the situation

http://www.dispatchjapan.com/blog/2011/02/moodys-sp-misread-japan-again.html

Financial markets all-but yawned on Tuesday when Moody’s issued a negative outlook on its ratings of Japanese national bonds. Markets were similarly unfazed late last month when S&P took the more significant step of downgrading its rating of Japanese government debt.....

But that’s not the whole story. Moody’s and S&P have a long history of inaccurately assessing the immediacy of Japan’s fiscal troubles. They have fueled false economic comparisons between Japan and some Asian and Europeans countries – most recently Greece – that have gone through genuine economic crises in recent years in part due to excessive government debt. And they have based their ratings on questionable – certainly debatable – assessments of the ability of Japan’s political world to tackle pressing economic challenges. Overall, however inadvertently, Moody’s and S&P have fed a false, negative narrative of a Japan hopelessly on a path to national ruin.....

Keep in mind that after a full decade of warnings of imminent financial crisis in Japan, both Moody’s and S&P still rate Japan’s national debt instruments as “high grade,” or only “slightly riskier than those with the top rating,” according to Dow Jones....

FALSE COMPARISONS: Dire warnings of imminent financial crisis in Japan have endured in part because they are based on faulty economic logic, including that Japan is somehow similar to European countries, especially Greece, Spain, and Ireland. The latter countries have both internal imbalances in the form of budget deficits and high government debt, and large external (current account) deficits. That double-deficit condition also existed in Thailand, South Korea, and other Asian nations that experienced horrific financial crises in 1997-1998.

Japan, by contrast, has a large current account surplus, putting the country at virtually no risk any time soon of the kind of crisis that gripped Greece last year, and wreaked havoc in Asia more than a decade ago. Chronic current account deficits put downward pressure on a nation’s currency, making it more likely foreign investors will flee. Capital flight makes it more difficult to finance government budget deficits, leading to big budget cuts and depressed economic activity. That, in turn, leads to more capital flight, and a downward economic spiral.

Unlike Greece, Spain, and Ireland, Japan is in no such danger.....

[rantnrave]

Did you ever make the decision on relocating btw?

[Guest_FaFa!_*]

Did you ever make the decision on relocating btw?

Not yet. Still looking into jobs, costs etc etc. Still time to make the final decision as not planning to move until summer at the earliest.

[rantnrave]

Not yet. Still looking into jobs, costs etc etc. Still time to make the final decision as not planning to move until summer at the earliest.

April seems to be the time when new teaching jobs abound. Probably not helpful pointing that out at the beginning of March!

[Guest_FaFa!_*]

April seems to be the time when new teaching jobs abound. Probably not helpful pointing that out at the beginning of March!

Yeah, timing is a bit tricky....but if we are going then frankly I'd like to get out of here as soon as possible. Heartily sick of this country. I did think about resurrecting that thread from off topic, but thought it would look like attention whoring. I'll bring it back from the dead when we have made a decision, but if anyone wants to give their tuppence then feel free to post...

http://www.housepricecrash.co.uk/forum/index.php?showtopic=159532&st=0&p=2895003&fromsearch=1entry2895003

[nohpc]

The reason why Japan has contrarian's drooling over it is because it is down 60% over it's peak 20 years ago in JAPANESE YEN.

Two things are consistently ignored however:

1) At it's peak Japanese stocks were more overvalued than any other stock market ever in the entire world that I can see. PE ration was 100 or something stupid.

2) Japanese stocks may have dropped in Japanese Yen but how much have they dropped in pounds sterling. Most of the drop in the Nikii is because of strenghtening of the Yen and therefor if you had owned the shares in pound sterling your paper losses would be much less.

Therefore any gains in Japanese stocks will likely be accompanied by a weakening in the Yen so if you are buying in Sterling a lot of the gains will be eaten up by currency losses.

[Guest_FaFa!_*]

The reason why Japan has contrarian's drooling over it is because it is down 60% over it's peak 20 years ago in JAPANESE YEN.

Two things are consistently ignored however:

1) At it's peak Japanese stocks were more overvalued than any other stock market ever in the entire world that I can see. PE ration was 100 or something stupid.

2) Japanese stocks may have dropped in Japanese Yen but how much have they dropped in pounds sterling. Most of the drop in the Nikii is because of strenghtening of the Yen and therefor if you had owned the shares in pound sterling your paper losses would be much less.

Therefore any gains in Japanese stocks will likely be accompanied by a weakening in the Yen so if you are buying in Sterling a lot of the gains will be eaten up by currency losses.

Thanks for that. Aren't there ways of playing foreign markets with an in built currency hedge? Do you have any thoughts on the Japanese debt mountain?

[nohpc]

Yes japan will need to default in the next 5 to 10

[Guest_ringledman_*]

I am a big fan of Japan. both its women and stocks

Firstly yes its P/E was around 50-100 times on the main market at its peak. The market now trades on a P/E of around 14 now. It was on a P/E of 20 or so a year to 18 months ago so this goes to show the huge earnings that Japanese companies are now making.

There are some staggering earnings growth going on. So the P/E is not dirt cheap but it aint over-expensive by any measure.

The price to book of Japan is dirt cheap at less than 1.

If you can't get even a bit excited about stocks trading at mid 1980s levels then stick to buying overvalued asset classes!

The debt problem and lack of gdp growth is no concern to me. Lets get one thing straight - there is NO link between the growth of an economy and the stock market returns. Absolutely none. Actually there is proven a slight uncorrelation, generally poor economies have better stock market returns as the starting valuations are lower.

Despite the government debt, the net position of Japan isnt that bad. Its only the government who are in debt due to stupid spending after the bubble (UK/USA now). The individuals and companies are hugely cash rich.

Remember they are a creditor nation along with China and Germany. They produce goods the world want. Japan is still full of amazing companies, Nintendo, Toyoto, etc, simply world class innovators.

In terms of demographics, Japan's population will soon fall which will push gdp per head up as the manufacturing plants will not close because the population falls! China has the aging process all to go.

With regards to the sterling / yen ratio, what is likely to happen? Is sterling going to suddenly double v the yen and wipe your gains out? I doubt it, we are not in a great position.

I forsee the yen weakening at say 10-15% per annum with the market rising at 20-40% per annum. Some of the smaller stocks can go ballistic in the right conditions.

Also as the yen weakens then exports will go through the roof. A lot of the big companies have huge foreign earnings so their profits will increase if the yen falls. Also try running an export company where your currency doubles in the space of 2 years. If you survive then you are one seriously lean operator. This is what has happened, they have cut their costs and increased efficiency massively.

I take the faber view that as the Japanese are 90% or so in bonds, once inflation hits then they will pile into equities as protection verses their 1% bond yields.

Love Japan.

Please do your own research.

Edited March 2, 2011 by ringledman

[nohpc]

I am a big fan of Japan. both its women and stocks

Firstly yes its P/E was around 50-100 times on the main market at its peak. The market now trades on a P/E of around 14 now. It was on a P/E of 20 or so a year to 18 months ago so this goes to show the huge earnings that Japanese companies are now making.

There are some staggering earnings growth going on. So the P/E is not dirt cheap but it aint over-expensive by any measure.

The price to book of Japan is dirt cheap at less than 1.

If you can't get even a bit excited about stocks trading at mid 1980s levels then stick to buying overvalued asset classes!

The debt problem and lack of gdp growth is no concern to me. Lets get one thing straight - there is NO link between the growth of an economy and the stock market returns. Absolutely none. Actually there is proven a slight uncorrelation, generally poor economies have better stock market returns as the starting valuations are lower.

Despite the government debt, the net position of Japan isnt that bad. Its only the government who are in debt due to stupid spending after the bubble (UK/USA now). The individuals and companies are hugely cash rich.

Remember they are a creditor nation along with China and Germany. They produce goods the world want. Japan is still full of amazing companies, Nintendo, Toyoto, etc, simply world class innovators.

In terms of demographics, Japan's population will soon fall which will push gdp per head up as the manufacturing plants will not close because the population falls! China has the aging process all to go.

With regards to the sterling / yen ratio, what is likely to happen? Is sterling going to suddenly double v the yen and wipe your gains out? I doubt it, we are not in a great position.

I forsee the yen weakening at say 10-15% per annum with the market rising at 20-40% per annum. Some of the smaller stocks can go ballistic in the right conditions.

Also as the yen weakens then exports will go through the roof. A lot of the big companies have huge foreign earnings so their profits will increase if the yen falls. Also try running an export company where your currency doubles in the space of 2 years. If you survive then you are one seriously lean operator. This is what has happened, they have cut their costs and increased efficiency massively.

I take the faber view that as the Japanese are 90% or so in bonds, once inflation hits then they will pile into equities as protection verses their 1% bond yields.

Love Japan.

Please do your own research.

I'd be excited about japanese stocks if I was japanese but I would like to see a chart of japanese stocks in pounds sterling. It will not be nearly as mouthwatering as the same chart in japanese yen,

Please realise how overvalued the yen is. This is due to the japs being obsessed with government bonds. When japanese stocks start to boom japanese investors will ditch their bonds and pile into stocks and the yen will devalue heavily. How are you going to hedge this?

In my opinion to ride the coming contrarian storm in japanese stocks and make money you must also be shorting japanese bonds at the same time.

If I knew how to do this I'd put my money in but I don't so I'm not. I prefer some of the emerging markets which have recently had heavy corrections in pounds.

[Guest_ringledman_*]

I'd be excited about japanese stocks if I was japanese but I would like to see a chart of japanese stocks in pounds sterling. It will not be nearly as mouthwatering as the same chart in japanese yen,

Please realise how overvalued the yen is. This is due to the japs being obsessed with government bonds. When japanese stocks start to boom japanese investors will ditch their bonds and pile into stocks and the yen will devalue heavily. How are you going to hedge this?

In my opinion to ride the coming contrarian storm in japanese stocks and make money you must also be shorting japanese bonds at the same time.

If I knew how to do this I'd put my money in but I don't so I'm not. I prefer some of the emerging markets which have recently had heavy corrections in pounds.

It is rather difficult to say exactly how overvalued the yen is v the pound. You have to put it in context that the yen has risen v the pound and dollar significantly for the past 50 years. I would say that fair value is probably around 180 or so to the mighty pound (say the yen is 35% overvalued v the pound) .

Although it was 240 pre the crisis, the pound was artificially high due to Brown's ponzi economy. Hence my rough calculation of fair value at approx 180 (see the max timeline view)-

http://finance.yahoo.com/echarts?s=GBPJPY=X+Interactive#chart1:symbol=gbpjpy=x;range=my;indicator=sma(50,200,10)+volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

If you measure the difference between the pound and yen on the big mac index then the two are much closer to each other at present exchange rates.

Rather than short japanese bonds why not just buy a hedged japanese fund? Granted these will no doubt have higher costs and I am always suspicious of management getting into the world of currencies.

The pound is not going to suddenly bounce significantly more than the rate at which Japanese stocks can rise. As the yen falls there will be a corresponding increase in earnings that will feed into stock prices. As I mentioned I forsee a situation in which the market rises at a pace quicker than the yen devalues. As such I think the risk of the yen crashing is overplayed. Much rather a drawn out decline.

If we had a rock solid currency backed by a rock solid economy then I would be suspicious of buying unhedged Japanese stocks. As we don't then I don't currently see Japanese stocks as a high risk play due to their low valuation and likelihood of outperforming the rate at which the yen 'may' fall.

Edited March 7, 2011 by ringledman

[nohpc]

This guy Littlewood who manages artemis strategic is massively short on japanese bonds. PS I like this guys investing style a lot.

Artemis’ Littlewood shorts ‘crushed’ Japanese bonds

21 Feb 2011 | 07:00

Emma Dunkley

Categories: Japan / Far East | Bonds

Tags: Japan

Artemis’ William Littlewood is running a “significant” short on Japanese government bonds in the view they will be damaged by Japan’s high public debt.

He has also increased a short on the Australian dollar, but is bullish on Asian currencies.

ADVERTISEMENT

The manager of the £798m Strategic Assets fund has shorts on Japanese government debt equivalent to nearly 50% of the fund, in the view the country has “gone beyond the point of no return”.

Japan’s gross debt to GDP ratio is similar to that of Greece, along with huge budget deficits and worsening demographics, he says.

“At some stage they are going to have to work out whether they are going to inflate or monetise their debt away,” he says. “I do not think Japan is very far from that, but when it happens, Japanese bonds will be crushed.”

Meanwhile Littlewood has upped his short on the Australian dollar from 6% to 8% since December, believing the currency is overvalued and vulnerable to any lessening demand for commodities from China.

Conversely, he is bullish on emerging market currencies in the view these countries will grow a lot faster than the West in the long run.

“They are very attractive counties to invest in, as they have substantial trade surpluses,” he says.

Read more: http://www.investmentweek.co.uk/investment-week/news/2027424/artemis-littlewood-shorts-crushed-japanese-bonds#ixzz1GJcVKzyf

Investment Week - News and analysis for investment advisors and wealth managers. Claim your free subscription today.

[nohpc]

I wasn't interested in Japan before but I definitely am now. This is a terrible thing to happen to the country but something tells me they will ultimately come back stronger from it.

Nothing like a major disaster to hurry things along. The UK and USA are just delaying the inevitable at the moment.

[Guest_ringledman_*]

I wasn't interested in Japan before but I definitely am now. This is a terrible thing to happen to the country but something tells me they will ultimately come back stronger from it.

Nothing like a major disaster to hurry things along. The UK and USA are just delaying the inevitable at the moment.

Here is an interesting chart of the Japanese market trading on a price to book of 1.

http://www.istockanalyst.com/finance/story/4977184/time-to-nibble-on-japanese-stocks

One of the most innovative nations on the planet and their stockmarket is trading at nothing more than the break up (liquidated) value of their company assets.

The small caps are trading on 0.7 times book value, implying you would get a 30% profit by breaking up the companies tomorrow and selling their plant, equipment and assets.

Truely amazing.

Pricing in nothing for the innovation and enterprise that they have shown the world over the last half century and will continue to do so over the next 50.

For comparison, the dow is trading on a price to book of 2.75.

Edited March 19, 2011 by ringledman

[nohpc]

Again the book value discount is only relative to massively overvalued yen.

What is the price : book in pounds sterling.

Very concise article in money week last Friday on how to short japan government bonds by spreadbetting.

[The Masked Tulip]

It has an ageing population, a declining birthrate and most of the young men appear to dream of going on reality TV shows where they are made up to look like young women, the public get to vote on them with the winner going on a date with a male pop star.

Oh, and they are broke.

Edited March 21, 2011 by The Masked Tulip

[Guest_FaFa!_*]

Excuse Mr Yen but GBPJPY 139 is quite high enough. There is no need to gain 900 points in under 2 weeks. You may sell off at your leisure

Thanking you kindly.

[Tankus]

There's something about radiation that scares the reason out of otherwise sober, rational people. Fear of the unknown is what it boils down to. What, after all, does the average person know about radiation? Three things: it's invisible, odorless and deadly.

The radiation horror unfolding in Fukushima Prefecture has claimed some unexpected victims, Shukan Asahi (April 8) finds. They are Japanese abroad – people who were, of course, as far away from the Tokyo Electric Power Company's stricken reactor as were the locals now regarding them with suspicion sometimes bordering on terror.

A certain "A-ko," for instance, is a 31-year-old woman teaching Japanese in Siem Reap. She's engaged to marry a Cambodian – or was. Now, it seems, the marriage is off.

"There are all these wild rumors flying around," she says. "Having sex with a Japanese can get you irradiated. Japanese women will give birth to deformed babies. Everyone believes them. I was here [when the March 11 tsunami devastated the nuclear power plant], but that doesn't seem to make a difference to people. My boyfriend's parents are insisting he break off with me.

A Japanese woman living in Bangkok says the hospital where she works as an interpreter is overwhelmed by Japan-bound Thais asking for iodine pills. No, they're not going to Fukushima – more likely to Kansai or Kyushu. No matter – they want protection anyway. To that extent has "Japan" become synonymous with "radiation."A Japanese tour group was enjoying a holiday in Scotland. At their hotel in Edinburgh they presented JCB credit cards. No dice, said the desk clerk; we don't accept those. The guests were nonplussed, as was the travel agency guide with them. He had never had such a problem before. He demanded an explanation, and got one: With a swath of Japan reduced to radioactive wasteland, "We don't know where the Japanese economy is going from here. We can't afford to trust Japanese credit cards."Is this a global outbreak of "discrimination against Japanese?" asks Shukan Asahi. Probably not. Everybody sympathizes with disaster victims, and Japan's in particular, with their much-admired "stoicism," have won hearts, assistance and contributions from individuals, organizations and governments worldwide. But at the same time, there seems to be a natural tendency, impervious alike to reason and innate compassion, to fear that disaster is contagious. "You almost feel you have to apologize for being Japanese," says the magazine.

http://japantoday.com/category/features/view/japans-disaster-becoming-contagious-abroad

[Guest_FaFa!_*]

http://tradersnarrative.wordpress.com/2011/04/05/betting-against-the-yen-a-once-in-a-lifetime-opportunity/

Food for thought. Thanking you