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Japan: could this time be different?

According to accepted wisdom, ‘this time it’s different’ is the most dangerous phrase in the investment world. History, experts caution, almost always repeats itself; only the delusional and desperate believe otherwise. But does this counsel always hold true?

Not if you pay heed to the mounting weight of evidence in favour of one of the world’s least loved equity markets: Japan. Notorious among investors for its numerous false dawns and defining ‘lost decade’ of the 1990s, Japan has long been the default cautionary tale for market practitioners fretting over another looming banking crisis in the west. Recently, however, the media has begun to express interest in the fruits of Japan’s efforts to overcome its troubled past; noting, in particular, that the country’s banking system, having endured in 2002-3 the kind of bad debt write-offs and taxpayer-funded recapitalisations currently facing many western banks, is in relatively rude health.

Nor has it gone unnoticed that Japan’s equity market – down less than 10% this year – has been remarkably resilient in the face of March’s devastating earthquake and tsunami, and lingering fears of a global recession. While not everyone is convinced that Japan’s relative lack of volatility means the market doesn’t have further to fall, there is little doubt that, at a price-to-book ratio of 0.9x, Japanese equities look fundamentally cheap; particularly given the balance sheet strength of corporate Japan.

Could, then, this time be different – at least for those contemplating a move into the country?

Some major investors certainly think so, with a number of multi-managers upping their allocation to Japan in recent months. Meanwhile influential IFAs such as Mark Dampier are beginning to set aside their natural wariness and view Japan in a more positive light.

Needless to say, however, not all investors are scrambling to buy the Japanese story. Detractors cite numerous concerns, not least the strong yen (although exports contribute much less to Japan’s GDP than widely assumed). Indeed, the yen recently touched a post-war high versus the US dollar, buoyed by its safe haven status and speculative inflows. But news today that the Bank of Japan has again intervened to suppress the currency’s value should assuage some investor fears over the country’s export sector, although the longer-term impact of the intervention may, as history suggests, prove to be limited.

Yen aside, Japan will remain a hard sell to investors who feel they have heard the ‘new dawn’ story too many times before. But there is little doubt overall sentiment towards the country appears to be turning. At a time when markets remain in thrall to macro fears, it seems investors seeking a potentially lucrative home for their capital could do worse than consider a stock market which appears well placed to outperform its counterparts in the west.

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