13 Reasons Japan Still Has a Bright Future

• Japanese companies and local banks are flush with cash. Deposits at Japanese banks exceed outstanding loans by $1.8 trillion.
• Approximately 95 percent of Japan’s $10-trillion sovereign debt is held by Japanese investors. It’s not dependent on the whims of foreign lenders.
• The country’s current gold and foreign exchange reserves of more than $1 trillion are second only to those of China.
• Japan is quite possibly the only developed economy in the world to pull off trade surpluses with China, Taiwan and South Korea.
• Japan’s creative spirits are alive and kicking. The country still grabs U.S. patents at a rate double that of the Koreans and Taiwanese together.
• The strong yen is giving Japanese companies the upper hand in grabbing overseas companies and commodities at reduced prices.
• The forward 12-month price-to-earnings ratio that peaked at 70 in 1989 is now only 13.6 for Japan’s entire market (Topix index).
• Share prices in Japan are just above book value compared with double book value in the United States.
• Peter Tasker of Argus Research finds that 25 percent of Japan’s companies trade at less than 10 times earnings compared to just 4 percent for the S&P 500 index.
• On a price to sales basis, Japan trades three times cheaper than a basket of the BRIC markets (Brazil, Russia, India and China).
• Japan’s market beats its own drum. Having holdings tied to Japan in your global portfolio is a great diversifier. Over the last ten years, Japan has moved in sync with the S&P 500 only 30 percent of the time.
• Japan’s government is injecting liquidity into the economy to offset the effects of the quake and tsunami and is proposing a cut in corporate tax rates.
• Finally, keep in mind that Japan is still the world’s third-largest economy – just a hair behind China. A huge economy like Japan’s will not post headline-grabbing double-digit economic growth but can still deliver sizable profits and cash flow.

Why You Should Buy Japan Now
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, April 25, 2011: Issue #1498
“Buy Japan now?” a friend asked recently. “Are you nuts?”
His sentiment is understandable. Aside from the unfathomable human suffering in Japan over the past several weeks, there have been enormous economic setbacks as well.
Sendai, the biggest port in northeast Japan and a major exporter of auto parts, machinery and marine products, was virtually wiped off the map. Half a dozen oil refineries in the same area, representing a third of the nation’s entire refining capacity, are shut down. Roads, bridges, railways and other major infrastructure have been destroyed. And the Japanese economy – already limping along for most of the past two decades – is also beset with the world’s highest public debt relative to GDP (225%) and a rapidly aging population.
Why would anyone want to invest here?
In my experience, those words accompany virtually every great buying situation. But it takes more than just a lack of interest to create a true contrarian opportunity. Both sentiment and valuations have to be at an extreme.
And that’s certainly the case here…
Japanese Stock Prices Are Less Than Book Value
The average Japanese stock is selling for less than 14 times its annual profit. That’s cheap, and Japanese accounting methods also tend to understate earnings. An even better indicator is found in book values (assets minus liabilities). Stocks around the world (including the United States, Europe and China) currently sell for approximately two times book value. In Japan, they sell for less than book value. By this measure, U.S. stocks are twice as expensive as Japanese stocks.
What will turn Japan’s market around? For starters, the enormous rebuilding that will be required over the next few years. Devastated areas account for seven percent of Japan’s economy and a substantial portion of its land mass. A lot of businesses will receive substantial contracts as a result of the catastrophe.
History shows that Japan is adept at rebounding from catastrophe. (Take World War II or the 1995 Kobe earthquake as examples.) And when Tokyo enters a bull market, it can look like the Silver Spurs Rodeo. For example, if you invested $10,000 in the S&P 500 in 1970, two decades later it would have been worth more than $76,000. Not bad.
But the same amount invested in the Nikkei 225 would have turned into more than $600,000.
How to Buy into Japan’s Advanced Economic Power
Although China’s economy has now eclipsed Japan’s in size, Japan is still Asia’s most advanced economic power, with world-leading technologies and an unmatched infrastructure.
The cost of doing business in Japan has decreased dramatically in recent years, as well. Land prices, office rents and labor costs have come way down. So have taxes and tariffs. And the government has instituted serious banking reforms.
The nation also sits on a mountain of personal financial assets – more than $100,000 for every man, woman and child. After a decade of negative stock market returns, most of this capital is sitting in low-yielding bank deposits. Even a small fraction of these assets returning to the equity market could give it a serious jolt.
So how do you play a rebound? Consider a Japan ETF or some of the country’s unloved blue chips like Toyota (NYSE: TM), Mitsubishi Financial (NYSE: MTU), Canon (NYSE: CAJ), or NTT DOCOMO (NYSE: DCM).
The healing there will take time, of course. But just as the U.S. stock market rebounded from the recent financial crisis quicker than almost anyone expected, things in Japan may look dramatically different in six to 12 months from now.
Of course, very few people believe that. But, in one sense, that’s a good thing. Negative sentiment and low valuations are the defining characteristics of contrarian investing.
Bottom fishermen, cast your nets.
Good investing,
Alexander Green

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