Reading the following article, you might want to consider the merits of buying property in Japan. Property markets in Japan have been overheated for some time. Japan in contrast is relatively undervalued. The question is how long will it remain in this condition. An election is due for March 2010. The question Japanese people will be asking after an annualised 15% contraction in the economy in the Mar-09 quarter, is whether they should continue their support for the Liberal Democratic Party (LDP). The LDP have enjoyed the support of the people for 5 decades - with the exception of a brief hiatus of 9 months. Most of this period corresponded to the Cold War alliance with the US.
With the Japanese economy locked in a 20 year slump, and the export slump in 2008, might the people consider a change? History suggests they are unlikely to change parties. However the long standing bear market suggests the problem is linked to the LDP and not to any particular administration.
The positives side is that the Japanese investors hold "$15 trillion in financial assets", mostly bonds and bank deposits, and "only 3.5% of it in the stockmarket". The positive is that Japanese investors have been sheltered from the economic collapse to a larger extent. The bad news is that they have had 20 years of poor returns, and their equity has shrunk significantly as a proportion of global assets, and more importantly, relative to the number of taxpayers, due to an aging population and zero population growth.
With the Japanese being the most patient slaves in the world to political mismanagement, you might ask how tolerant are they expected to be. The recovery will create a phenomenal investment opportunity because those bank deposits will find their way into the stockmarket. Clearly fund managers are waiting for a sign of political change. Unfortunately the shift in assets itself is likely to delay any shift since markets tend to over-expect prompting politicians to under-deliver.
Interestingly in the Mar-09 quarter, Japanese investors were net buyers of stocks for the first time since 1991. Already the Japanese trade surplus has collapsed. It is only a matter of time before the Japanese yen collapses as well for the following reasons:
1. The savers are not getting any younger - the percentage of retirees is increasing
2. Any recovery is likely to boost spending as well as exports. In the past only the export sector was strong. In the 'future' the domestic economy will need to be reformed, which will result in the broader based economic recovery we have not seen since the 1980s.
You might then wonder what are the implications for investors in Japan, with a falling yen on the horizon, and greater economic rigor. The problem of course is that this is a leap of faith. Japan may not recover for some time. Generally it takes an economic emergency to drive reform. In the case of Japan it might take a charismatic leader who can unit LDP party factions. There is little sign of a voter defection. Instead we are seeing a defection by LDP members into external groups. Surely this will lead to some less entrenched factional outcomes. Herein lies the potential for surprise.
A collapse in the currency is of course not good for investors, though I would expect such a collapse to be quick because broad based consumption and foreign investment (China, etc) will be more important than export surpluses. Clearly the country will need to address its lack of population growth, and such a change could be an important element of reform and recovery, and clearly good for the property market. I would however expect an increase in property taxes since the huge debt needs to be funded. The other question remains the outlook for interest rates. They will most certainly increase, but will they match the foreign increases as we look forward towards higher inflation.
Clearly Japanese stocks make a lot of sense as well. A weaker yen will provide greater stimulus to exporters. These exporters will benefit from retained earnings from offshore assets, as well as greater profitability from retained Japanese plant. Some Japanese stocks also offer excellent exposure to China.
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Andrew Sheldon www.sheldonthinks.com
The positives side is that the Japanese investors hold "$15 trillion in financial assets", mostly bonds and bank deposits, and "only 3.5% of it in the stockmarket". The positive is that Japanese investors have been sheltered from the economic collapse to a larger extent. The bad news is that they have had 20 years of poor returns, and their equity has shrunk significantly as a proportion of global assets, and more importantly, relative to the number of taxpayers, due to an aging population and zero population growth.
With the Japanese being the most patient slaves in the world to political mismanagement, you might ask how tolerant are they expected to be. The recovery will create a phenomenal investment opportunity because those bank deposits will find their way into the stockmarket. Clearly fund managers are waiting for a sign of political change. Unfortunately the shift in assets itself is likely to delay any shift since markets tend to over-expect prompting politicians to under-deliver.
Interestingly in the Mar-09 quarter, Japanese investors were net buyers of stocks for the first time since 1991. Already the Japanese trade surplus has collapsed. It is only a matter of time before the Japanese yen collapses as well for the following reasons:
1. The savers are not getting any younger - the percentage of retirees is increasing
2. Any recovery is likely to boost spending as well as exports. In the past only the export sector was strong. In the 'future' the domestic economy will need to be reformed, which will result in the broader based economic recovery we have not seen since the 1980s.
You might then wonder what are the implications for investors in Japan, with a falling yen on the horizon, and greater economic rigor. The problem of course is that this is a leap of faith. Japan may not recover for some time. Generally it takes an economic emergency to drive reform. In the case of Japan it might take a charismatic leader who can unit LDP party factions. There is little sign of a voter defection. Instead we are seeing a defection by LDP members into external groups. Surely this will lead to some less entrenched factional outcomes. Herein lies the potential for surprise.
A collapse in the currency is of course not good for investors, though I would expect such a collapse to be quick because broad based consumption and foreign investment (China, etc) will be more important than export surpluses. Clearly the country will need to address its lack of population growth, and such a change could be an important element of reform and recovery, and clearly good for the property market. I would however expect an increase in property taxes since the huge debt needs to be funded. The other question remains the outlook for interest rates. They will most certainly increase, but will they match the foreign increases as we look forward towards higher inflation.
Clearly Japanese stocks make a lot of sense as well. A weaker yen will provide greater stimulus to exporters. These exporters will benefit from retained earnings from offshore assets, as well as greater profitability from retained Japanese plant. Some Japanese stocks also offer excellent exposure to China.
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Andrew Sheldon www.sheldonthinks.com
