Why You Should Probably Buy Japan Now
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, April 25, 2011: Issue #1498
“Buy Japan now?” a friend asked recently. “Are you nuts?”
His sentiment is understandable. Aside from the unfathomable human suffering in Japan over the past several weeks, there have been enormous economic setbacks as well.
Sendai, the biggest port in northeast Japan and a major exporter of auto parts, machinery and marine products, was virtually wiped off the map. Half a dozen oil refineries in the same area, representing a third of the nation’s entire refining capacity, are shut down. Roads, bridges, railways and other major infrastructure have been destroyed. And the Japanese economy – already limping along for most of the past two decades – is also beset with the world’s highest public debt relative to GDP (225%) and a rapidly aging population.
Why would anyone want to invest here?
In my experience, those words accompany virtually every great buying situation. But it takes more than just a lack of interest to create a true contrarian opportunity. Both sentiment and valuations have to be at an extreme.
And that’s certainly the case here…
Japanese Stock Prices Are Less Than Book Value
The average Japanese stock is selling for less than 14 times its annual profit. That’s cheap, and Japanese accounting methods also tend to understate earnings. An even better indicator is found in book values (assets minus liabilities). Stocks around the world (including the United States, Europe and China) currently sell for approximately two times book value. In Japan, they sell for less than book value. By this measure, U.S. stocks are twice as expensive as Japanese stocks.
What will turn Japan’s market around? For starters, the enormous rebuilding that will be required over the next few years. Devastated areas account for seven percent of Japan’s economy and a substantial portion of its land mass. A lot of businesses will receive substantial contracts as a result of the catastrophe.
History shows that Japan is adept at rebounding from catastrophe. (Take World War II or the 1995 Kobe earthquake as examples.) And when Tokyo enters a bull market, it can look like the Silver Spurs Rodeo. For example, if you invested $10,000 in the S&P 500 in 1970, two decades later it would have been worth more than $76,000. Not bad.
But the same amount invested in the Nikkei 225 would have turned into more than $600,000.
How to Buy into Japan’s Advanced Economic Power
Although China’s economy has now eclipsed Japan’s in size, Japan is still Asia’s most advanced economic power, with world-leading technologies and an unmatched infrastructure.
The cost of doing business in Japan has decreased dramatically in recent years, as well. Land prices, office rents and labor costs have come way down. So have taxes and tariffs. And the government has instituted serious banking reforms.
The nation also sits on a mountain of personal financial assets – more than $100,000 for every man, woman and child. After a decade of negative stock market returns, most of this capital is sitting in low-yielding bank deposits. Even a small fraction of these assets returning to the equity market could give it a serious jolt.
So how do you play a rebound? Consider a Japan ETF or some of the country’s unloved blue chips like Toyota (NYSE: TM), Mitsubishi Financial (NYSE: MTU), Canon (NYSE: CAJ), or NTT DOCOMO (NYSE: DCM).
The healing there will take time, of course. But just as the U.S. stock market rebounded from the recent financial crisis quicker than almost anyone expected, things in Japan may look dramatically different in six to 12 months from now.
Of course, very few people believe that. But, in one sense, that’s a good thing. Negative sentiment and low valuations are the defining characteristics of contrarian investing.
Bottom fishermen, cast your nets.
Good investing,
Alexander Green
Any investment contains risk. Please see our disclaimer.
8 Responses to “Why You Should Probably Buy Japan Now”
Comments
By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy.
Check out our selection of daily investment research:
 |
 |
Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
Goop article. Would have been great if you gave an ETF suggestion.
Reply
EWJ: ETF….
Reply
You, Sir, are assuming all is well in Japan. What if this nuclear tradgedy is FAR worse than is being reported? You are naive to think that the meltdown of 6 nuclear reactors will not have a catostrophic effect on Jpan’s economy. I’ll pass on that investment for now.
Reply
Sorry, but your friend is right, you are nuts.
1 month after the Kobe earthquake there was no water nor electricity, one year later some people were still living in tents…Very adept the Japanese people at rebuilding.
The construction industry is totally corrupted, 20 years of building highways to nowhere and bridges to the smallest islands haven’t helped Japan to rebound.
Japan is doomed, most of their debt is held by the Japanese themselves, and when they start to sell their bonds we’ll see fireworks and your Japan investment will go down the drain.
Having lived there for more than 10 years I have seen enough to know there won’t be another Japanese economic miracle soon, things will have to get a lot worse before they can hope to start improving.
Reply
Al, Thank you for the excellent idea. This is a very good moment to go into blue chips ETF in Japan.
Stanley
Reply
This was a good article. I certainly agree that “blood is running in the streets” for Japan currently. Earlier inthe year, I did not buy into your advise to invest in the Wisdom Tree Japan Fund, but I definitely plan to buy into it as soon as Japan gets all of the nuclear reactors fully under control. Many years ago, I worked in the Nuclear Power industry for GE and believe me things can get a whole lor worse if they do not get the radioactivity completely under control. Loss of control of any one reactor can make the earthquake disaster look like childs play by comparison.
Reply
I agree in principle with much of what Daniel (who posted above) has to say about Japan. I too have lived here for about 7 years.
What has occurred in the last decade has been a strategic decision by the Zaibatsu to invest heavily in China. Costs are lower and can be sold in China proper, while the profits are exported back to Japan to create white collar jobs and grease the wheels that make decisions.
Further I believe that there will be a Marshall plan in the Tohoku region that will employ anyone wanting a job for the next few years.
Debt is an issue yes. But the market has been in the doldrums for 20 years now. Value investors would be foolish to simply dismiss the possibility of growth in the Japanese market which has hitched itself firmly to the Chinese rising star.
Reply
I would like to comment here from an insider’s perspective. I was born and raised here until high school and went on to go to university in the U.S. Together with my working experience during the economic bubble in 1980′s in the U.S., I lived there for about 10 years. So as a native Japanese I experienced both economies, especially lost 10 or 20 years of post era after bubble burst in 1990. I can tell you that it is not a pleasant experience to go through the earthquake even in Tokyo on March 11. (A huge bookshelf almost fell on me.) I had to walk back home at late cold night as no subways or public transportation were working.I did not know exactly what happened right after the earthquake. But it was more than sad to find out all the news stories on TV what happened and continued to develop.
But I can certainly tell you that what kind of gene people here have in common. It was reported by some media to outside countries but I can reaffirm and nod to myself that how catastrophe/crisis resistant these people are. They have gone through post war destruction/reconstruction, multiple oil crisis in 1970′s and Kobe earthquake in 1994. As I actually live here and be part of community/society here, I feel their (and my) determination to come back. This is the country of being united where people are gladly take a part to sacrifice for the whole. This was repeated many many times in the country’s history and I am sure it will repeat again this time. From bottom of my heart. I wrote a short article to explain this. Read here.
Reply