While the election results effectively amount to a double-down on so-called
Abenomics stimulus policies, investors were not prepared. In the week prior
to the election, funds focused on Japanese equity suffered net outflows of
$4.4 billion – the largest negative number since 2002 (the year when EPFR
Global began tracking the data).
There are few believers in a sustainable Japanese bull market. And, on the
surface, why should there be? Japan faces some serious structural issues –
high debt levels, aging demographics, and so on.
But everyone already knows the macro headwinds. Far fewer understand the
micro story. Over the past 25 years, Japanese companies faced the twin
burdens of chronic deflation and an overvalued currency. What has been the
result? Corporate Japan is now extremely lean and efficient. Aggregate
Japanese return on equity has been quietly trending upwards, and corporate
profits just hit a record high relative to GDP. Japanese companies also
happen to sit atop US$4 trillion in cash. That means capex can be radically
increased without borrowing.
Japan is also a veritable hotbed of companies at the forefront of several
technologies reshaping the global economy – including robotics, electric
cars, and alternative energy (in the words of one analyst, “they make cool
Fortunately for the intrepid investor, one does not have to pay up for this
growth. Japanese equities are priced at the frontier of value, if not over
the edge – deep into bargain territory. The small-cap sector in Japan
trades below their book value. And companies have been steadily increasing
their dividends, yet payout ratios still average only 25% to 30% of
Since Japan’s epic bull market peaked in 1989, there have been too many
false dawns to name. Now, in one of its best runs since 1949 and longest in
nearly 30 years, the Japanese Nikkei 225 Index has risen for 13 days.
Clearly, the market may be running too hot in the short-term. But over the
medium-term, a synchronized global expansion should support growth and
Perhaps most importantly, the Japanese yen itself has become dramatically
undervalued – the currency is the cheapest it has been in 32 years. In a
globalized world, corporate profits typically show a strong correlation
with cheaper exchange rates. This is the crucial difference between now and
previous Japanese bull markets over the last 20 years, where the yen was
expensive. Those rallies were never built to last. This one will be far
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
. Follow Tyler on Twitter at
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