“The Land of the Rising Sun”

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA

Newsletter

July 24, 2023 – DJIA = 35,227 – S&P 500 = 4,536 – Nasdaq = 14,032

“The Land of the Rising Sun”

Japan is the world's 3rd largest economy as measured by GDP (gross domestic product). Its economic recovery in the post World War II era is referred to as a miracle. From the 1970’s through 1990, Japan registered strong growth and became the envy of the world. This encouraged speculation and crazy consumption as Japanese investors bought global icons such as the Empire State Building and Pebble Beach golf resort. But as it’s said, all good things must come to an end and the Japanese story was no exception. 

During the 1980’s the Japanese economy and markets transformed into one of the largest asset bubbles in history. This bubble burst and caused a 30-year funk which became known as the “Lost Decades”. Deflation, economic stagflation, and rising unemployment dominated Japan.  

The Bank of Japan (the central bank of Japan) tried various monetary policies to try to push the Japanese economy out of its rut. The BOJ introduced the world to ZIRP or “zero interest rate policy” which the rest of the world embraced after the Great Financial Crisis in 2008-2009. They also flooded their economy with yen via a government bond purchasing program. All this stimulus was dubbed “Abenomics” after the prime minister Shinzo Abe.       

Naturally, as the Japanese economy imploded, so did their financial markets. The Nikkei 225 (the main Japanese stock index) lost 46% in 10 months. Japanese stocks continued to chop lower for the next 18 years eventually reaching a bottom in 2008. At its low the Nikkei had lost more than 80% from in peak in 1989. 

Currently, Japan’s stock market has rebounded although it remains over 15% below the all-time highs reached in 1989. The Japanese economy and corporate environment have changed from its bubble days and some global investors are taking notice. Bloomberg has reported that Warren Buffett is investing in Japan and has made trips to meet with Tokyo firms and various management teams (May 17, 2023). Other institutions are committing resources to Japan as well. 

What is attracting investors to the “Land of the Rising Sun”? Corporate and consumer behavior has greatly changed since the bubble days of the late 1980’s. Below is a graph from Hedgeye Risk Management comparing some data from the end of 1989 to today. The summary is that Japanese stocks are significantly more profitable and trade at materially cheaper valuations compared to the U.S. stocks.

Highlighting a couple of items, the earnings (as measured by earnings per share for the index) have grown from $21 per share to $150 per share. This has helped the price-to-earnings ratio drop from 61 times earnings to 12 times. In general, the lower is better for this ratio. As comparison, the S&P 500 trades on around 25 times trailing earnings.  

Here is another graph comparing the Japanese and U.S corporate performance over the past 27 years. (Again, from Hedgeye Risk Management.) Corporate revenues in the United States have tripled during this time while the Japanese sales are flat. Turning to profitability, U.S. corporate profits have increased 600% compared to 1,100% for their Japanese counterparts. So, Japan managers have almost double the growth of company profits as compared to American companies. And this was done with the same level of sales as 27 years ago.     

“Made in Japan” began as an insult in the 1970’s. It implied inexpensive and lower quality products. That changed during subsequent decades and Japan’s success was studied and copied worldwide. This led to a bubble that rivaled the Dutch Tulip Bubble from the 1600’s. 

Japan has survived almost 30 years of miserable economic and stock market performance. In addition to enduring this quagmire, Japan have changed and improved, and their stocks might be attractive. Global investing includes more risks than decisions on U.S. companies, but there are compelling reasons to take a look. Contact us if you have questions or want to learn more.