Japan has been a stock market dog for 15 years. The Japanese economy is the world’s second-largest and its resurgence after World War II is amazing, but the country has been a trap for investors.
That picture might be changing. Let’s go over some history first before we talk about why Japanese stock makes sense today.
By the early 1970s, Japan had lifted itself out of the war’s destruction. Then the manufacturing companies there got a miracle: the first oil embargo in 1973, followed by years of high oil prices.
America was just stumbling out of the Vietnam War and we were in no position to handle screaming oil prices and the runaway inflation that came with them. We still drove huge cars that sucked gas like a sponge. But our old enemies had a solution, and by 1980 every American was familiar with Toyota.
The Japanese car makers introduced fuelefficient cars that were far more reliable than anything Detroit offered. I’ll never forget my grandfather bringing home a Toyota Corolla. The car got great gas mileage.
Those cars fueled a Japanese stock market move that rivaled what we experienced in the 1920s. By the late 1980s, Japan was the hottest thing going, from equities to land to trend-setting business strategies. By December 1989, the Nikkei index hit 40,000, up from 7,000 at the decade’s start.
But 40,000 turned out to be the highwater mark for the Nikkei. The index spent the next decade moving lower. The American bull market was so powerful that almost every nation realized net worth improvements, except Japan. It must have been a difficult time to be a Japanese businessperson.
As the greatest bear market since the Depression came to an end, the Nikkei was sitting a little over 8,000. The market lost 80 percent in 13 years. It wasn’t just stocks, however, that got smashed.
Real estate values in Tokyo fell by half and there were no longer stories about Japanese companies buying legendary assets in America like Rockefeller Center and Pebble Beach Golf Course. The yen depreciated so much against the dollar in the ’90s that such transactions were unthinkable.
And while many American companies did, indeed, adopt smart new business strategies pioneered in Japan, such as justin-time manufacturing, we no longer looked across the Pacific Ocean for inspiration.
Since the bottom two years ago, the Nikkei has moved in a similar fashion to our own equity markets. On a relative basis, Japanese companies are trading at significant discounts to stocks here. Investors have primarily ignored the country for so many years that it looks like some decent value is popping up.
Walt Deemer, who is a brilliant technician and longtime Wall Street analyst, was in Barron’s last week talking about a unique spin on the recent strength we are seeing in Japanese stocks. During our last bull market, he observed, Japan sucked wind. Why can’t Japan’s market do something on the upside while the rest of us spin down for a while? I think Walt could be onto something.
Hauke is a local money manager. His column appears weekly. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at email@example.com.