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It’s been a momentous year for Japan. On 1 May it entered a new Emperor’s era, on 20 November – after 2,887 days on the job – Abe Shinzō became the longest-serving prime minister in the history of Japan’s constitutional government, and later this month, on 24 December, it will be exactly 30 years since the Japanese stock market bubble burst.
Having risen steadily through the 1970s and 80s, during its ‘economic miracle’ – and when Japan dominated the global electronics industry with innovative new products like the VHS video recorder and Sony Walkman – between 1986 and 1989, Japan’s Nikkei stock market index tripled to just shy of 39,000*. It accounted for more than one third of the world’s stock market capitalisation**. Real estate prices experienced similar exponential growth: the land underneath the Tokyo Imperial Palace was famously worth as much as the entire state of California.
The bubble then burst and the stock market crashed in spectacular fashion, plunging nearly 50% from its peak the following year, and bottoming at around 15,000 in 1992. Today, the Japanese stock market represents just over 8% of the global stock market capitalisation***.
Likewise, the property bubble burst leaving Tokyo real estate worth just 10% of its peak value in 2004^. According to Waverton’s CIO Bill Dinning, today the 70 listed real estate companies, which collectively cover over 1,000 buildings in the city, is worth just $90 billion – that’s less than the market cap of ride sharing companies Uber and Lyft.
The country was left in a severe financial crisis and economic stagnation – from which it took decades to recover.
After many false dawns, it wasn’t until Abe Shinzō came into power seven years ago, that Japanese fortunes finally started to turn around.
Faced with numerous problems including stagnant growth, unfavourable demographics and a mountain of debt, Abe began his famous “Abenomics” program: a three-pronged approach to overcoming these problems in the form of monetary policy, fiscal stimulus and structural reform.
And, thirty years after the bubble burst, investors have only just recovered their losses: a UK investor who put £1,000 into the Nikkei 225 at the high in 1989 would have just £1,015 today^^.
In contrast, a UK investor putting the same amount in the stock market the day Abe Shinzō came into power in December 2012, would have £2,253 seven years later^^^.
Looking ahead, there are a number of reasons to be optimistic that the Japanese stock market can continue to reward.
Firstly, lost in the escalating trade war tensions between China and the US is the fact that the US has trade deals signed or pending with Japan, South Korea, Canada and Mexico – making up four of the US’s top seven trading partners and accounting for a combined 60% of US trade. The managers of Guinness Global Equity Income fund said recently: “President Trump and Prime Minister Abe have found some common ground with regards to tariffs. Japan has agreed to a trade deal that would allow more agricultural imports from the US and avoid new tariffs on Japanese cars exported to the US.”
Secondly, valuations are looking good compared with other developed markets and Japan’s own history. Not only this, but returns on equity are above 9% and both dividends and share buy backs are at record highs, as corporate governance improves^*.
Thirdly, Abe’s tenure means there has been political stability – and he has the mandate to continue with his structural reforms. Japan seems to have confidence in his ability to bring about long-term positive change.
Japan’s biggest problem is its demographics – with roughly a third of the population over 65. This has naturally impacted the workforce. This is why Abe is trying to entice women back to the workforce and automation is so important for the country.
Then there’s trade wars again. While some deals have been made, there is no guarantee that Trump won’t change his mind or indeed a new President next year could reverse decisions made. And all the time there is still uncertainty with other countries, global growth is slowing. As Japan does better in a moderate growth environment, it could impact the economy and stock market.
And finally, the consumption tax rise in October (from 8% to 10%) could, in the short-term, drag down consumer spending.
Overall, we are relatively optimistic about the outlook for Japan, and thankfully good active managers can make money even when the wider stock market is struggling.
Seven Elite Rated funds date back to when Abe came into power in 2012. Their performance over this time is shown below:
|Rank||Fund||Performance^^^||Turning £1,000 into|
|1||Baillie Gifford Shin Nippon plc||365.0%||£4,650.00|
|2||Baillie Gifford Japan Trust plc||305.9%||£4,059.00|
|3||Baillie Gifford Japanese Smaller Companies||267.0%||£3,969.79|
|4||Baillie Gifford Japanese||188.6%||£2,886.27|
|5||AXA Framlington Japan||186.2%||£2,861.62|
|6||T. Rowe Price Japanese Equity||166.2%||£2,662.30|
|7||Man GLG Japan CoreAlpha||135.2%||£2,351.68|
|Nikkei 225 index||125.3%||£2,253.34|
*As at 24 December 1989
**Source: Economist, 2011
***Source: Statistica, February 2019
^Source: (Barsky, 2009).
^^Source: FE Analytics, total returns in sterling, 24 December 1989 to 3 December 2019
^^^Source: FE Analytics, total returns in sterling, 26 December 2012 to 3 December 2019