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I’m old enough to remember when Japan was taking over the world.
In the late 1980s, at the peak of the boom, Japan’s stock market was the most valuable in the world and Japanese companies were destroying the competition in the U.S.A. and everywhere else. They made the best cars, the best electronics—you name it.
At one point the land under the imperial palace in Tokyo was worth more than all the real estate in California. And that was back when people actually wanted to buy real estate in California.
But since the bubble popped in 1990, the land of the rising sun has become the market that the world forgot. Even today, more than 30 years later, the Nikkei 225 index is a long way below the peaks seen in late 1989. Japan has been an economic story of slow growth, recession, deflation, and dismal investment returns.
But as Warren Buffett ramps up his own big bets in the Tokyo market, Berkshire Hathaway just increased its stake in five Japanese trading companies—more on that in a moment—here’s the case for the other side.
Japan remains the second biggest free economy in the world.
It’s the home of global corporate powerhouses, including many companies way out front on technological innovation. Japanese companies have filed for more green energy patents than any others.
And it’s a country where the workers can fill in a sink hole in a week and not think it especially remarkable.
Meanwhile Buffett isn’t the only person who is finding good values in Japanese stocks. SG Securities puts the entire Tokyo market on less than 15 times forecast earnings, even while earnings per share are expected to rise by nearly 10% this year. (The U.S. is on 20 times forecast earnings—with earnings expected to rise by less than 2%.)
The dividend yield on the Nikkei 225 index
NIY00,
2.5%, is more than five times the yield on the 10 year government bond.
The yield on the S&P 500
SPX,
at 1.6%, is less than half that of the U.S. 10 Year Treasury Bond.
Even the habitually gloomy money managers at GMO, a white shoe investment firm in Boston, think Japanese stocks are reasonable value—especially smaller and less glamorous “value” stocks.
Among the many overlooked benefits of Japanese stocks: After decades of Post Bubble Stress Disorder, many companies have accumulated very strong balance sheets, including large cash piles.
Meanwhile deflation, the scourge of the economy for years, may finally be on its way out.
Here’s another benefit of Japan for the regular investor: It helps diversify your portfolio, which should reduce volatility. I ran numbers using Portfolio Visualizer: Over 10 and 15 years, and even going back to the 1990s, the Japanese market has had a notably lower monthly correlation with the U.S. than Europe has.
Most U.S. investors are grossly underinvested in Japan, as well as in the rest of Asia and the Pacific rim.
That’s because Japan and Asia-Pacific make up only a third of the typical international stock fund, compared to two-thirds for Europe.
And because the average investor has way too little invested in international stocks to begin with. Goldman Sachs estimated in 2021 that the average U.S. investor had 72% of their stock portfolio in the U.S., and just 28% outside.
Which means they’re 72% U.S.A., 18% Europe, and 10% Asia, including 6% Japan.
It doesn’t make a lot of sense.
The U.S. accounts for 4% of the world’s population, 15% of its economic output, and 24% of global GDP even when measured by dollars.
Asia and the Pacific Rim account for 60% of the world’s population.
Yes, the U.S. is the world’s richest country with the biggest stock market, but in 1900 that distinction fell to Great Britain. The biggest sector in the global stock market was U.K. railways.
How’d that work out?
Funds like Vanguard’s FTSE Europe
VGK,
and FTSE Pacific
VPL,
let long-term investors fine-tune their exposure to the world’s regions better than the basic international indexes. Vanguard Pacific, unlike some other funds that invest in advanced Asia-Pacific markets, sensibly includes South Korea.
Or (as I have) you can always add a specific Asia-Pacific or Japanese fund to your portfolio, alongside the typical, plain-vanilla international funds available in your 401(k), to bump up your exposure.
Those worried about the fluctuations in the yen have the option of a fund that uses derivatives to hedge away that risk. The best known is the WisdomTree Hedged Equity Japan ETF
DXJ,
currently booming because the Japanese market has been flying while the yen has been falling. It’s up nearly 30% this year, and 90% in three.
As for Buffett?
It was September of 2020 when Buffett, now 92, revealed he’d spent $6.5 billion buying up 5% of the Japanese trading companies Mitsubishi, Mitsui, Itochu, Maruebni, and Sumitomo.
The average return on those stocks since then is 150%–in U.S. dollars.
The return on the S&P 500 over the same period? About 30%.
By my math, he and Berkshire Hathaway
BRK.B,
investors have made about $10 billion. In three years. Not bad.
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