By Sheryl Sutherland*
Many of us have had a winter of discontent - who am I to be excluded? The muse flexed her wings and deserted me; we have reached a rapprochement you will be pleased to know. However, the last month or two has had Japan firmly on my radar. Happy to share my thoughts with you. Health warning: there are three articlescoming up. Happy reading.
Japan has been a favoured holiday destination for decades but unloved by the investment world since the 1980's. What we often don’t realise is that Japan is the world’s fourth largest economy and, as the Business Insider put it, has “spent the last three decades in a Rip Van Winkle-like state but may be snapping out of it.”
The years of chronic stagnation may be past with inflation exceeding the Bank of Japan (BoJ) target of 2% for two years running. The Nikkei has soared, hitting a new high, breaking the record held since 1989. Furthermore, the BoJ finally concluded its notorious monetary experiment - eight years of negative interest rates and seventeen years of no rate hikes. The Japanese themselves refer to this dark period as ‘ushinawareta juneri’, or ‘the lost decades’. The yen has however sunk to its lowest against the US dollar in 34 years. This gulf is what is keeping some investors at bay.
So how did Japan get here? It had one of the fastest growing economies for most of the twentieth century and work practices were quoted by numerous CEOs who admired and envied Japan’s growth after World War II. In fact, some years during the 1960’s the GDP grew by more than 10%.
Land values in Tokyo doubled in the period 1986-1988. Economists, who as we know exist to give us numbers, at one point estimated the value of the few acres under the city’s Imperial palace were worth more than all the real estate combined. This bubble existed alongside the stock market boom as company valuations were swollen by their real estate holdings. (I know you are thinking “uh oh”, but there it is, nothing like hindsight). Consequently, gains from land values and shares in 1987 equalled more than 40% of the GDP.
The BoJ raised interbank lending rates in 1989 which burst the bubble, the share market crashed 60% between 1989-1992 and real estate values with them. The OECD data showed that Japan’s GDP growth from 1992-2007 was barely above 1.1% and of course the economy was further mucked around by the 1997 Asian Financial Crisis. The main drivers of any economy are people, in one way or another. Unsurprisingly, spending reduced dramatically so by the late 1990’s prices were falling across the board. Rates were lowered to nearly 0.00% but the island nation stagnated for most of the two decades since, despite the introduction of negative interest rates in 2016.
In 2024 the BoJ raised rates from 0.0% to 0.1% (no, that’s not a typo). The big change was that Japan had inflation – great news for them. Prices rose 2.7% in March from the preceding 12 months. The driver behind the inflation was two-fold; companies absorbed the price increases to encourage customers (not great for profits) and secondly the pandemic helped to normalise price hikes. Furthermore, workers finally got wage increases.
The Business Insider suggests that there may still be missteps – consumption is still fragile and the economy narrowly missed a recession. Is this now a destination we should consider for our portfolios? Japanese equities have been attracting increased interest for global investors. One fund manager states that they have struggled to consistently find businesses that clear their “quality and valuation hurdles.” They summarise the past history as follows: “a fragile banking sector and historical challenges, an aging population, rigid labour markets, and resistance to reforms” which arguably persist today. They further suggest that the market is “littered” with businesses featuring complex organisational structures, sprawling and often unrelated divisions, sub-optimal capital allocation policies execution, and opaque governance.
They believe that the move to Japanese stocks is to reallocate funds to another liquid market in Asia and to hedge the risk that Japan is finally on the brink of a sustainable move out of deflation. Additionally, the Japan Exchange Group, the operator of the Tokyo stock exchange, will publicly name their corporate leaders who fail to comply with appropriate governance.
Warren Buffet, aka the sage from Omaha, has been invested in the Japanese market for about a decade. His exposure has increased from about $6 billion to $15 billion in under three years, his stakes in Japanese companies sit at around 7% with stocks up 146% on average since his first investment. His investment company, Berkshire Hathaway, just revealed it owned just over 5% of Itochu, Marubeni, Mitsui, Mitsubishi and Sumitomo in 2020. The conglomerate boosted its portions in the fine ‘sogu shosha’ or trading houses to between 6.2% and 6.8% by November last year and has since increased his exposure to over 7%.
His decision to invest was a surprising one as he tends to concentrate his wagers and sticks mainly to the US. He explained however, at his recent shareholders meeting, that the investment was a “no brainer”, emphasising that the stocks were absolute bargains during a recent trip to Tokyo and describing their valuations as “ridiculous” relative to prevailing interest rates.
More on this next week…
*Sheryl Sutherland is director of The Financial Strategies Group, and author of Girls Just Want to Have Fund$ – Every Women’s Guide to Financial Independence, Money, Money, Money Ain’t it Funny – How to Wire your Brain for Wealth, and co-author of Smart Money – How to structure your New Zealand business or investments and pay less tax. You can contact her here.
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