Twenty three years is a very long time to wait. But there are hopeful signs that the Japanese Equity Market maybe finally breaking out of its long term bear market.
The Nikkei 225 reached its peak in 1989 and then collapsed under their banks which had counted on property prices to continue rising. At one point during the late 1980s Japan’s imperial palace in Tokyo and its land (1’300 sq meters) was worth more than the entire real estate value of California. Japanese investors owned Rockefeller Center in NY and companies like Sony were on top of the world (remember the walkman). Matsuda (a Japanese businessman) owned the largest collection of Ferraris in the world and the Japanese dominated the Forbes billionaires list. But much has changed since then. Japan’s policymakers failed to fix the problems of the Japanese economy (lifetime employment, uncompetitive corporations and mounting debt) and Japan entered what is widely seen now as their ‘lost decade’ where GDP barely grew between 2000 and 2009. From a high of 38’900 in 1989, the Nikkei 225 currently stands at 12’300 which is a drop of nearly 70% over a twenty three year period.
However finally there are signs that the new Prime minister Mr. Shinzo Abe understands that radical measures are needed to get Japan out of this deflationary cycle and on a growth path once again. Japan has targeted an inflation rate of now 2% (this was previously unheard of), and has pursued aggressively monetary policy-that of easing. There is evidence that the financial markets are responding to the new policy measures. Any guesses what the best performing equity market is in 2013? Is it Japan’s benchmark Nikkei 225 Average which is up 18% year to date. However the policy measures have also drastically weakened the yen – so investors have better hedged their Japanese equity bets! – (Macro hedge funds have one main bet right now which they are actively trading: Shorting the Japanese Yen against the USD which has been an immensely profitable trade this year).
Concluding thoughts
There have been many times where we thought Japan would finally rebound and that Japanese equities would recover, but only to fall back to depressed levels. While investing in Japanese equities is tricky because of different accounting standards and valuation concerns (Japanese equities are expensive on a PE basis despite poor corporate governance), we would advise investors who want to buy into Japan to trade Japan through ETFs. One well known, large and liquid ETF is the i-shares Japan (ticker EWJ). Another -perhaps for some investors a better ETF- is the Wisdom Tree Japan Hedged Equity fund ETF (ticker DXJ). This ETF allows investors to profit from the rise in the Japanese equity markets without giving away their gains due to the Yen weakening.
