Japan. Is it time to buy?
Japanese stocks have hit their highest level of 33 years with markets closing in on record highs last seen in the 1980s. So, what’s behind the rally and does it have further to run?
Japan’s stock market experienced a rapid surge in stock prices throughout the decade. The Nikkei 225, an index representing the performance of the largest stocks on the TSE, reached its peak on December 29, 1989, at an all-time high of 38,915.87. Speculative investments, including stocks and land, were in high demand, leading to soaring prices and inflated valuations.
The prices of both residential and commercial real estate skyrocketed, reaching unprecedented levels. At the peak of the bubble, the value of the land surrounding the Imperial Palace in Tokyo was reportedly worth more than the entire state of California.
Despite the overall upward trend, the Japanese stock market experienced significant volatility during the 1980s. Sharp price swings and speculative trading became common, creating a sense of instability in the market. By the end of the decade, signs of an overheated economy and financial imbalances began to emerge. In 1990, the stock market bubble burst, leading to a prolonged period of economic stagnation known as the “Lost Decade” or the “Lost 20 Years.”
There are two main indexes that look at the Japanese stock market, the TOPIX and the Nikkei 225 index which are both up between 16% and 20% in 2023. In comparison to the US market, Japanese stocks still look relatively undervalued.
The Japanese stock market has had several false dawns since the 1990’s. There is a trail of fund managers every few years that say Japan is the next big thing and, so far, none of them have seen their proclamation come to fruition.
So, has anything really changed?
Corporate governance has been an issue for Japanese companies. In 2015, half of companies had ZERO independent directors which seems incredible. There has been a focus on this and just 2 years later 90% had at least 2.
Insider ownership was almost non-existent until recent years. Often companies will reward their employees by giving them stock if they hit certain targets. This helps align employee goals with shareholders. In 2013, there were on 4 companies out of 500 in the TOPIX that any form of stock-based compensation. Almost all do now.
Japan has been searching for inflation for years and has finally got some, core CPI is 3.4% which the rest of the world is probably quite jealous of right now. As Japan had 0% inflation for many years, it’s unlikely the central banks are going to start tightening monetary policy now.
Should you buy Japanese stock now?
Warren Buffett has just made substantial investments into Japanese companies and in April alone foreigner investors put in USD $15 Billion.
When it come to investment Warren Buffett is an innovator. If you look at how he made his trades into Japan, they really are beautifully executed. The money going in now, could be accused of imitating which reminds us of the old investment and business adage.
First come the innovators.
Then come the imitators.
Then come the idiots.
Obviously, no investor wants to be found in the third group.
Almost without exception, by the time you read an article called “Is it time to buy?” (Please, refer to title) the smart money is already there and much of the upside has been missed. We already know if you haven’t invested in Japan yet, you have missed 16-20% of upside this year already. However, The TOPIX is still around 25% away from the 1989 high, so many would think there is still some room to run.
Valuations still look good and valuations matter. Your risk profile and time horizon will always be 2 of the most important factors for the appropriateness of any investment.
Time will tell if this is a new economic era for Japan or just another false dawn.
If you would like information on any of the above areas or any other area of financial planning, please contact.
Matt Baker, Managing Director, Singapore Expat Advisory
Email: advice@singaporeexpatadvisory.com
Tel/Whatsapp +65 9432 8781
www.singaporeexpatadvisory.com
Singapore Expat Advisory is an agency for Promiseland Pte. Ltd and are authorised and regulated by the Monetary Authority of Singapore (MAS).
General Information Only This article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any products (including funds, stocks) mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment. This article has not been reviewed by the MAS.