Big in Japan

After languishing behind its western counterpart for years, is it finally for a Japanese renaissance?

Key Points:

·   In the late 1980’s, Japan was the dominant market, bigger than even ‘Uncle Sam’.  In 1989, Japan’s market cap was 45% of the global stock capitalisation, with the US a distant second at 33%.

·   At the time, the Emperor’s palace and grounds in Tokyo were worth more than all of the real estate in California. Eight Japanese corporations, five of them Banks, were part of the Top 10 largest companies in the world.

·   A great deal of that Japanese stock market rally was driven by irrational exuberance (with average price earnings ratios of 58), and a firm belief from global investors about the strength and durability of the Japanese economic model, particularly after the 1987 crash.

·   Excess leverage, a rapid aging population with persistent low growth, and eventually deflation contributed to Japan’s decline.  Not to mention investors began to become mesmerised by the phenomenal global impact of US technology stocks, something that Japan could not match.

·    In the 20 years from 1990 to 2019, the US market went up 19x whilst the Japanese market was up only 4.8%.

·   But in recent years Japan has begun to re-emerge. A bit of (desperately needed) inflation means the Japanese Central Bank is the dove in a world of hawks, and a more robust economy and rock bottom valuations, have started to attract overseas investors. Since the start of 2022, the Japanese market has outperformed the US by 25%.

·   Is Japan’s years of relative underperformance finally over?