Expat Investment Asia
Why, in short, would anybody want to choose Tokyo now when there
are so many good alternatives on offer?
Actually there are several good reasons, but most of them are technical.
That’s to say, they come down to factors that have more to
do with stock market psychology than with actual company performances.
One of these factors is simply that Japan has now got past the
bottom point in its degrading economic cycle, and that’s a
time when the automatic trading programs in the major institutions’
offices always switch out of selling mode and into buying mode,
so that share prices tend to get driven sharply higher.
Expat Investment Asia & Japanese Shares
Another factor behind the recent surge in share prices is that
Japanese mutual funds are now starting to sell up their American investments
and to buy Japanese shares instead. They’re doing this not because
they particularly like Japanese companies, but rather because they’ve
been losing a lot of their US profits due to the weakening of the
dollar against the yen. Wall Street’s 18 per cent rise since
January has been very nice for US investors, but the 10 per cent
shift in the exchange rate has made it a lot less attractive for
Tokyo-based institutions.
Expat Investment Asia And Tokyo
But there are also some rather better reasons for the Tokyo revival,
and we should start to see the benefits of these appearing in the
next year or two. Part of the reason why Japan’s corporate
profits look so poor at the moment is that many companies are finally
getting round to writing off the capital losses that they made ten
years ago when the property market collapsed.
In effect, their declared profits are actually rather worse than
their trading profits, so there’s a hidden upside; this is
especially true of the banks, which are making some genuine efforts
to reform and improve themselves.
Expat Investment Asia & The Fiscal Lunacy
The fiscal lunacy of the 1970s and 1980s is starting to fade into
the distance, but the burden is still there for most Japanese companies,
and we can’t really start to analyse the present stock market
situation properly unless we dip back into the gruesome history of
how Japan got into its current mess in the first place. If you know
the whole tragic Tokyo story off by heart, please feel free to skip
the following half-dozen paragraphs; if, on the other hand, you were
among the millions of investors who were still in short trousers at
the time (and that includes a lot of fund managers, of course), you
might find a quick précis helpful. The 1980s were a
great time to be alive in Japan. The country’s massive export
industries were conquering the world, the yen was all-powerful,
and the government took the view that the best way to keep this
booming economy growing was to subsidise bank loans so that Japanese
companies could afford to borrow everything they needed at rock-bottom
rates. (It wasn’t quite as simple as a straight lending subsidy,
but we won’t quibble about the details.)
Expat Investment Asia - Expansion Spree
And borrow they did. Japan’s companies went on an expansion
spree that didn’t stop. Because they were paying only 1 per
cent or 2 per cent interest to their banks, they felt no pressing
need to justify their ever-growing overdrafts with bigger profits.
So a curious sort of business culture grew up: you borrowed as much
as you could, you forgot the bottom line (such an irrelevance!), and
you went all out for market share. If you had too many employees,
never mind. Just borrow some more money. Sooner or later, some
of this easy money was bound to find its way into the property markets.
Well-paid employees offered too much for inner-city apartments,
companies made increasingly outrageous bids for the best bits of
corporate property, and property prices started to rise right across
the country. But the real trouble started when the companies then
went back to their banks and tried to use their swollen property
assets as collateral for more corporate loans - again at rock-bottom
rates. Foolishly, the banks agreed, apparently unaware that it was
their own money that was underpinning their clients’ inflated
capital valuations.
Expat Investment Asia - Share Prices
Either way, the stock market loved it. Share prices soared throughout
the late 1980s, boosted by the confidence that these incredibly large
capital valuations generated. Investors didn’t worry about high
p/es, which often exceeded 100, or the pitiful dividends they got
from their investments - for the very good reason that they wouldn’t
have got more than 1 per cent anyway from their bank deposit accounts
or their government bonds. It’s that curious relationship between
terrible dividends (average 0.6 per cent) and interest/bond yields
(average 1-2 per cent) that still tends to underpin the high valuation
of the Japanese stock market now. But it was a bubble all the
same, and it had to burst some time. The first signs of doubt about
the property market came in the second half of 1989, as the Nikkei
Average headed for the 40,000 mark. By Christmas the collapse in
property valuations had done for the capital valuation of every
company that had borrowed against its property portfolio, and by
New Year the stock markets were virtually in free fall. But instead
of rebounding, as they had done in New York in 1987, they carried
on dropping: by October 1990 the Nikkei had halved to 20,000, and
after a couple of years of wobbling around the 15,000-25,000 range
it slumped back to the 13,000-15,000 area from which it has only
recently returned.
Expat Investment Asia & Nikkei
There’s no reason to fear that the Nikkei will fall back any
further now, because the overall fundamental valuations are better
these days. But the trouble has always been that the slump has left
a lot of companies with skeletons in their closets. Japan still has
hundreds of thousands of big corporations which we would normally
have to describe as insolvent under Western accounting rules, because
they don’t have either the funds or the assets needed to repay
their existing loans. Worse, there are at least a thousand banks in
the same situation. It takes guts to admit to these things,
but one by one the banks are coming clean and admitting to the scale
of their bad loans. A few have gone bust, and a lot more have been
put up for sale. Opinions vary about how many of the smaller Japanese
banks can last the distance, but most of the bigger ones will survive,
with or without foreign ownership.
Expat Investment Asia & Interest From Abroad
There’s certainly plenty of interest from abroad in the idea
of joining the Japanese investment scene. Japanese investors typically
save 15 per cent of their earnings, the highest rate in the developed
world, and more than twice as much as their European counterparts.
(Americans, by comparison, are net spenders who draw out more than
they save.) So Japan’s most recent moves toward opening up its
financial markets have been especially important. We are, of
course, talking about the celebrated ‘Big Bang’, which
is now under way, and which will utterly change the shape of Tokyo’s
financial markets over the next three to five years. The Japanese
government has firmly committed itself to a rolling programme of
reforms that will sweep away all the old privileges that used to
keep Japan’s inefficient institutions cosily insulated from
all the shocks of true international competition.
|
