At the end of 1989, the Japanese Nikkei 225 index hit a record high of 38,915.87, amid huge euphoria.
However, there followed 34 years of crises, natural disasters, deflation – and a decline of close to 80 per cent in the index.
But last week, to the accompaniment of much rejoicing, the Nikkei finally regained its level of 1989, leaping to 39,239.
This recovery was driven by the global semiconductor stock boom, but also by a diverse range of other more fundamental factors.
These include the forecast from brokers Nomura that if America chooses Donald Trump as its president in November, there will be a further breakdown in US-Chinese relations. The beneficiaries would be companies that sell more to America than China, like the car manufacturer Subaru and noodle specialist Toyo Suisan. Its ramen noodles are a favourite among Americans on a budget seeking something delicious.
Majestic: To the accompaniment of much rejoicing, the Nikkei finally regained its level of 1989, leaping to 39,239
Does the Japanese market offer something similarly appealing to those looking for diversification? After all, according to one forecast, the Nikkei may be set to advance to 42,000. This prediction has raised eyebrows among those who have waited more than three decades for a bounceback in the index. But Joe Bauernfreund, manager of the AVI Japan Opportunity Trust, says there are reasons to believe ‘that this time, it’s different.’
He says: ‘The market isn’t being driven by unsustainably high valuations. It is earnings and corporate reform led. I think we are at the early stages of the revival – and that there is further upside. There is a huge opportunity in overlooked small cap stocks.’
These key reforms are the ‘Abenomics’ stimulus initiatives, introduced by the late prime minister Shinzo Abe, and the new Tokyo Stock Exchange regulations, designed to cure the sclerotic corporate culture.
Under the rules, which have been described as ‘a game changer’ by Goldman Sachs, companies must use spare cash for the benefit of shareholders. This should ensure that there are fewer companies whose stock market valuation is below the book value of their assets
These governance changes – which Goldman Sachs analysts argue could bring a ‘transformational’ year for the Japanese market – have been accompanied by shifts in attitudes.
Prime minister Fumio Kishida is promoting ‘a new capitalism’ as part of which there is less distaste for takeovers, and employees are seen as deserving of more regular pay rises. In June last year, as the Nikkei made its ascent, I overcame my reservations and invested in two Japanese funds: AVI Japan Opportunity and Vanguard Japan ETF (exchange traded fund).
Some of my inspiration for this came from Berkshire Hathaway boss Warren Buffett’s decision to put money into Itochu, Marubeni Mitsubishi, Mitsui and Sumitomo.
But even Buffett’s belief in Japan’s potential is almost muted compared with the optimism being expressed by such giants as BlackRock, the world’s biggest fund manager.
Such has been the upsurge in confidence that, in January, international investors splashed out £10.5bn on Japanese shares.
The nation’s famously thrifty citizens have also preferred cash to shares, despite negative interest rates. This policy may finally end this month, as part of Japan’s process of normalisation. But Kishida will be hoping to entice these reluctant investors into the stock market with the new Nisa (Nippon Individual Savings Account), a scheme based on the UK’s Isa.
If you think Japan deserves a place in your Isa, it is worth doing some homework on the intricacies of its stock markets. For example, the Nikkei may be the most closely-followed index. But its make-up is based on the price of stocks, rather than company size.
As result of this bizarre arrangement, car giant Toyota, the country’s largest company, makes up 1.1 per cent of the index. The number one constituent is the far smaller Fast Retailing group, owner of the Uniqlo chain.
These and other complexities mean that I will be putting money not directly into shares, but into funds, particularly those that are focusing on digitisation, such as Japan Jupiter Income, one of Bestinvest’s top picks. Other best buy funds include Baillie Gifford Shin Nippon, which concentrates on smaller companies, and Man GLG Japan Core Alpha for the adventurous.
In 1989, Sony, founded in Tokyo in 1946, led the world in innovation.
In this century, it was supplanted by Apple, founded in 1976.
I am taking a bet on Japan making up for lost time.
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