Japan: can you be optimistic after being downgraded?28 January, 2011, 13:52. Posted by Zarathustra
Tags: Economy, Japan, Stocks
As James Mackintosh put it, Japan has pretty much been a classic value trap. Just as you think that Japanese equities are cheap, they managed to get even cheaper. I have previously expressed my scepticism on whether the Japanese equities is headed to a bull market, or to be more precisely, why a bull market in Japanese equities does not matter to investors outside Japan, because inflation in Japan will most probably mean that Japanese Yen will be depreciating, making the return on Japanese equities in dollar terms pretty much unattractive.
But at least for those who are in Japan or only care about return in Japanese Yen term, there is another piece of good news. In yesterday’s research, I pointed out that according to life-cycle hypothesis, a person should have most money to invest when they are in there mid thirties to mid fifties, thus a high proportion of that cohort of people (which I labelled them as “Net Investors”) in the total population would imply a higher valuation. This part of the hypothesis seemed to be working pretty well:
Source: Robert Shiller
Interestingly, when you look at the proportion of this cohort to the total population, after declining for almost 2 decades, it is rising in Japan again.
If this hypothesis is correct, it should predict a higher valuation for the Japanese equities market as a whole, which means a higher return in the next 10 years or so. Of course, that’s in Japanese Yen term. In dollar term (un-hedged), the prospect of better economic growth coupled with inflation will mean that Japanese government bonds, which are held mostly by local Japanese companies and people, will lose its attraction as the fixed income streams from bonds will have decreasing purchasing power over time. At such a high debt level, as the government need to look elsewhere for buyers, Japanese Yen will most likely have huge downward pressure. Thus even Japanese equities can do well in Yen term, it means very little for foreign investors unless the weakness in Yen can really help the economy to grow a lot faster, such that the growth which drives equities prices can more than offset the weakness in Yen, providing superior return even in other currencies terms.