Is Japan still a buy?
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It’s been a while since we looked at the Japanese stock market.
Last year, particularly the last six months or so, was fantastic for investors in Japan. The Nikkei 225 ended the year up 40% - not bad going for a country that is just shaking off a 16-year bear market.
But 2006 has been altogether less pleasant for those who have bought into the Japanese recovery. Japan has been one of the weakest performing global stock markets this year. At the low point of the recent global sell-off, the market was in fact down 5% on the start of the year.
So is Japan still a buy?
One of the main reasons that Japan has suffered so badly in recent weeks is the fear that any US consumer slowdown would impact on the country’s exporters, damaging the burgeoning recovery. The falling dollar is also a worry – as the yen strengthens, Japanese goods become less affordable for US consumers.
It's a reasonable concern. The US consumer is the most important consumer in the world, and it goes without saying that a slowdown in the US would have a significant impact on the global economy.
But of all the economies that would be affected, most analysts believe that Japan is probably the best able to maintain economic growth without the US to prop it up.
“Japan [is] better placed to accommodate a US slowdown than…a couple of years ago,” says Julien Seetharamdoo at Royal Bank of Scotland. “Household spending growth has been on an upward trend since late 2003. Corporate profitability has improved and even the housing market is showing signs of life.”
And as Julian Jessop of Capital Economics puts it: “Positive trends in both business and consumer confidence suggest domestic demand will remain firm, helping to offset slower global growth and a stronger yen.”
Another reason for optimism is that the Bank of Japan is being very careful about abandoning its zero interest-rate policy, which is probably the one event concerning investors the most.
The Bank has been steadily cutting back on the amount of money it puts into the money market. When there is less money available, interest rates will tend to rise as commercial banks compete for funds.
As our readers are probably aware, rising interest rates tend to act as a curb on growth. And what both the Japanese government and investors are worried about is that the Bank will hike rates too quickly, stopping the recovery in its tracks.
But there were encouraging signs on that front last week, when the Bank acted to inject more money back into the system, to prevent overnight interest rates from rising too high.
This is good news because it suggests that demand for loans is increasing strongly, which means in turn that spending is continuing to rise. The Bank’s cautious stance also suggests that when interest rates do finally rise, it will be a sign that the Japanese economy really is firing on all cylinders.
Of course, when the Bank of Japan does finally hike interest rates, we could well see more panic attacks grip global stock markets as investors run for cover as the cheap money dries up. In the recent market fall, investors liquidated their holdings in riskier assets and dived back into dollar assets - which is one of the main reasons that US stock markets suffered the least.
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But what happens if the dollar starts diving as US interest rates no longer provide a decent enough return compared to other countries to attract foreign capital?
In that case, Japan looks pretty good to us. The yen is a natural beneficiary of a falling dollar. Yes, so is the euro, but the ongoing process of integrating new, untested economies from Eastern Europe with existing basket-cases like Italy is not a recipe for currency stability.
Obviously, we prefer to put our faith in gold than in any paper currency - but if you had to choose a paper currency at the moment, the yen looks a reasonable bet.
And if all this wasn’t enough, Japan could be facing a stream of takeovers next year. We wrote about this in MoneyWeek recently, but if you missed it subscribers can read the article here: Is corporate Japan facing an onslaught of takeovers?
And if you’re not a subscriber yet, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the stock markets...
The FTSE 100 closed up 113 points on Friday, at 5,791. Miners were among the main gainers, continuing to rally from the recent correction. For a full market report, see: London market close
Over in continental Europe, the Paris Cac 40 fell 29 points to end Monday's trading at 5,015, while the German Dax slipped 33 to close at 5,755. US markets were closed on Monday.
In Asian trading hours, the Nikkei 225 fell 56 points to 15,859. Retailers were among the main losers after household spending fell by more than expected in April.
This morning, oil headed higher in New York, trading at around $71.60 a barrel. Brent crude was also higher, trading at around $69.90.
Meanwhile, spot gold was little changed, trading at around $649.70 an ounce, while silver traded at around $12.75.
And here in the UK, mobile phone giant Vodafone has hiked its final dividend to 3.87p, giving a full-year dividend of 6.07p a share. It plans to return £9bn to shareholders in the coming financial year.
And our two recommended articles for today...
Guaranteed equity bonds are a guaranteed waste of time
- Guaranteed equity bonds promise to deliver the safety of a bond with the spice of the stock market. But in reality, they offer the worst of both worlds, says MoneyWeek editor Merryn Somerset Webb. To find out why your money is almost certainly better off in a savings account, click here: Guaranteed equity bonds are a guaranteed waste of time
Why UK interest rates will rise
- Bankruptcy levels are at record highs and low income families are having difficulty making ends meet. And yet the Bank of England's next move is likely to be a hike in interest rates, rather than a cut, says Brian Durrant of the Fleet Street Letter. To find out why, and to learn why the commodities boom and the soaring numbers of super-rich people are related, click here: Why UK interest rates will rise
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