The biggest winners from Abenomics
I’ve landed in Japan.
I’m based in Kyoto, which is the ancient capital. It’s a bit like Oxford or Cambridge, a lovely old museum city.
What you’ve heard is true: Japan is clean. It’s efficient. The food is good (careful what you order though). The trains are fast and expensive. The shops sell things of the highest quality. The people are polite (provided you’re not inadvertently breaking any rules). Seems to be a good life over here.
That’s the travelogue out of the way…
Now let’s get down to brass tacks: the goings-on in the Japanese stock market.
A balloon held underwater
To understand why I’m into Japanese stocks, you need a bit of history.
Japan boomed for forty years after the Second World War. From a standing start, by 1989 Japanese made up 30% of the value of all stocks worldwide.
Then the market crashed, and the economy fell into a coma. Between 1989 and 2003, the Nikkei 225 (an index of Japan’s biggest companies), fell by 80%. By 2012 things were hardly better — the Nikkei was still down 77% from its peak.
Then at the beginning of 2013, things started to change. Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda started a new policy to breathe life back into the economy. They started printing lots of money. And so far, it’s worked.
The way I see it is, from 1989 to 2012 Japan was like a balloon held underwater. Japanese companies wanted to produce more and employ more workers. But tight money from the Bank of Japan held them back.
Now Japan is getting back to where it should be. More people are joining the workforce, corporate profits are rising, and banks are investing more.
In a nutshell, that’s why I’m excited about Japan. It’s enjoying a big growth spurt while it catches up to its potential.
You can see this happy story in the following chart. It shows the Nikkei 225 from 2012 (Abenomics got going in early 2013). It’s up 166%.
Abenomics has been good for corporate Japan in general. It got more money flowing through the system. That’s always helpful. Hence the higher stock prices.
But Abenomics has done more than just wash extra cash through the economy. It’s injected the country with an extra dynamism. People and companies are taking more risks.
You can see this playing out in the JASDAQ index, which is Japan’s equivalent of America’s Nasdaq. The Jasdaq is home to Japan’s technology and startup businesses.
The Jasdaq is up 294% since February 2012, which leaves the Nikkei 225’s 166% gains in the shade.
The weaker yen has helped the Jasdaq. Abenomics (read: money printing) has caused the yen to weaken dramatically against its trading partners. In 2012 at the beginning of this chart you could get 77 yen for a dollar; now a dollar buys 109 yen.
The Jasdaq is full of exporters and high-tech companies that have a lot of IP. Since 2010, Japan has more than doubled its annual overseas sales of intellectual property. Good times for Jasdaq companies.
Third order effect
So the bank of Japan prints more money. The first order effect is that the yen gets weaker. The second order effect is more spending, which increases corporate profits and share prices. Another second-order effect is increased sales on overseas markets as a result of a weaker yen.
People are spending money more freely so there’s more work to do (now in Japan, there are 155 jobs for every 100 applicants). So a third order effect of Abenomics is companies trying new tricks to attract talent.
The FT is reporting that more and more companies are choosing to list on the stock market in order to attract employees, since a listed business is perceived as more stable and prestigious than an unlisted one. 91 companies listed on Japan’s markets this year.
Which is a knock-on effect, of a knock-on effect, of Abenomics.
The price of growth
So far I’ve only talked about growth: why earnings in Japan are growing, why the economy is capable of more, why unemployment is falling, that sort of thing.
But we’re stock market investors. Growth is only half the story. Growth is no use unless it’s fairly priced.
And despite the fact that the turnaround is well underway over here, Japanese growth stocks can still be bought seriously on the cheap. That’s a legacy of the 1990s and 2000s, when the outlook for Japanese stocks was dismal and valuations were incredibly cheap.
Next week I’m going to look more closely at valuations in Japan — one of the only places on Earth where quality growth companies are still going fairly cheap.