Japanese Market Awakening from Its Long Slumber?

by: Graham Summers June 04, 2008 | about stocks: EWJ / JPP    

Graham Summers

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“Light as a feather! Light as a feather! It’s absolutely like flying above the clouds!” 

The 1952 Japanese bestseller, The General Manager, was a literary signpost marking the beginning of Japan’s shift from post WWII- recovery to worldwide economic powerhouse. The success of the book’s protagonist is chronicled by his automobile purchases, culminating in him acquiring a Lincoln and driving around the famous Meiji shrine shouting the above line.

Japan’s rise became meteoric soon after. By the ‘60s, most Japanese consumers had acquired televisions, washing machines and refrigerators. A decade later they were buying cars, color TVs and air conditioners— in fact, a major catalyst for China’s decision to adopt a more market-focused economy occurred when Chinese officials realized the massive discrepancy between the average Chinese citizen and his Japanese counterpart.

By the 1980s, Japan had become an economic superpower. Eight of the ten largest banks in the world were Japanese. The Tokyo stock exchange was roughly the same size as the NYSE. Japanese businessmen began buying up luxury items of all kinds—Rolexes, Armani suits, Van Gogh paintings— as well as financial and real estate assets— the Rockefeller Center in NY and two major firm studios in Hollywood.

However, both the financial and real estate markets were beginning to shows signs of tremendous bubbledom— between 1955 and 1990 stocks rose 100-fold while real estate rose 75 fold.

What followed was exactly what you would expect: the bubble burst, the stock market fell over 75%, and Japanese banks were on the verge of bankruptcy. Between 1992 and 1999, Japan's GDP grew at an annualized rate of 1%. And two recessions—one in the late ‘90s, the other in 2001— made sure the idea of a comeback was all but wiped out of the public’s consciousnous.

Until today…

One item that seems to have eluded the mainstream financial media is the fact that Japan’s Nikkei has begun outperforming US market indexes handily. Since the market staged a temporary bottom on March 17, the Nikkei has risen nearly 20% compared to the S&P 500’s gain of roughly 10%.

In light of this, it’s tempting to say that the Nikkei has awakened from its decade-long slumber. It has certainly begun to draw attention from several investing legends. Most notable is Jean-Marie Eveillard, whose First Eagle Global Fund has the distinction of only suffering two down years in its 30+ year history.

In his fund’s latest conference call Eveillard noted, “today the Ben Graham-type companies, in other words, the deep value stocks, are not available, really, in the U.S. or in Europe. They’re only available in Japan.”

Eveillard says he’s particularly attracted to several Japanese industrials—SMC and Keyence. He states, “we found out that even if we assumed that operating profits would go down 30% over the next 12 months for those companies, the valuations on that basis remain quite moderate.”

Between the Nikkei’s recent performance and guys like Jean-Marie Eveillard snooping around Japan, I’m getting very interested in the country. I’m going to start doing some snooping myself. I’ll report my findings on these pages in the coming weeks. Until then…

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This article has 4 comments:

  •  
    Jun 05 08:47 AM
    Lies, damned lies, and statistics.

    Sure, Japan is outperforming in the short time frame of less than 90 days. Yes, Japan is up from the March lows ~20 percent versus ~10 percent for the US.

    But one would assume that you are aware that Japan bottomed nearly a full 35 percent (!) off its 2007 highs, whereas the US bottomed roughly 19 percent off its 2007 highs.

    So the US currently stands (basis the S&P 500) about 11 or 12 percent off its 2007 highs, while Japan's Nikkei 225 still remains, after this 20 percent rally, about 21 percent below its 2007 highs. Yes, Virgina, it takes more of a percentage gain to get back the larger percentage loss, and Japan is still hanging on to a dandy loss from last year. In fact, Japan is still farther down from it's 2007 highs than the S&P 500 was at the apparent *bottom* of its swoon on March 17.

    Now tell me who is outperforming whom in, say, the past 11 months.

    Note: The TOPIX is running about 3 percent better than the Nikkei, but both Japanese indices languish much lower compared to their 2007 highs than the S&P 500. An equivalent S&P 500 loss from the 2007 highs would have taken that index down to somewhere just above 1,000. So far, it's never gotten close.
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  •  
    Jun 05 04:10 PM
    Touché!
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  •  
    Jun 06 09:19 PM
    A review of the Nikkei 225 weekly chart shows that it made a higher high in mid-May and as such broke the down trend line from the high made in summer of 2007. Cannot conclude that it is the beginning of an uptrend, but if I were short I would have covered.
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  •  
    Jun 07 12:12 PM
    I'm becoming bullish on Japan after its nearly two decade bear market in equities and real estate. I recently lived there for 2 years and I have never seen such pessimism. If you believe in economic cycles it's about time for this one to turn as the energy and commodity cycle turned at the beginning of the century a two decade bear market.
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