The Most Exciting Market? Japan

The Most Exciting Market? Japan

With stocks up 20% this year, offering the highest returns from any major global market, as well as a significant shot of confidence from Warren Buffett’s spring visit, Japan’s stock market has been wildly robust. But the Japanese market’s success this year could also be the result of the yen collapsing, contends an article in The Wall Street Journal, and indeed Japanese stocks have followed the same trajectory as the S&P 500 this year.

As the U.S. seems to be shifting away from market capitalism, Japan appears to be moving toward it, propelled by the reforms that were put in place a decade ago. By focusing more on profitability, and building up more net cash, directors have made the Japanese market a friendlier environment for investors. Thanks to persistent inflation, holding onto cash is less desirable, and layoffs aren’t as fraught as they have been in the past, given the surplus of jobs available in Japan as the population ages. Meanwhile, Japan’s strategic location in the Pacific make it easier for the U.S. and Europe to decrease their dependence on China as a manufacturing base. As Peter Tasker of Arcus Investment told The Journal, “I see a confluence of the incentives for investors put in place by the authorities and the position of Japan geopolitically as being very important, particularly as the yen is so cheap.”

But the yen’s cheapness could actually be a detriment; Japanese stocks have gained only when the yen dips, and policy makers have warned that they could intervene if it falls too low. And if you take away the yen’s movement, the Japanese stock market is equally matched to the U.S., making it less attractive to bulls in the short term. And if the yen strengthens under tightening in order to combat inflation—which is likely—stocks will fall yet again, the article maintains.

There are major differences between the Japanese and U.S. markets, with the former being widely diversified and the latter dominated by big tech companies, which makes the correlated performance between the two a bit of a mystery. While traders might be pouring billions into the market—a scenario that hasn’t been proven—the Japanese market has only matched the U.S. for the last couple of years, which could indicate that perhaps investors aren’t quite yet sold on the idea that Japan has fixed its stock market.

But there are still plenty of investors willing to believe that change is underway, and that Japan is ripe for investing—something that is evidenced in stock valuations, many of which are trading at well below book value. While they might not be the bargain-basement prices of a decade ago, Japanese stocks are still much cheaper than U.S. equities. Japan faces many challenges that might not make it the best short-term investment, but given its tilt toward market capitalism that will result in higher-quality companies, it could be very valuable in the medium- to long-term, the article concludes.