Comment: Why Japan is attractive

Japan’s Nikkei 225 went past 40,000 in recent days for the first time; Alberto Matellán suggests it is no flash in the pan as he explains what has been happening in the Japanese market versus the Japanese economy

The country’s currency and better productive investments are among factors explaining its relative attractiveness versus Asian competitors, explains Alberto Matellán.

Jonathan Boyar notes that Berkshire Hathaway, Warren Buffett’s investment firm, started buying in Japan back in 2019, with significant appreciation in dollar terms.

Japan: an increasingly attractive market for investors

On February 22, the Nikkei 225, the main indicator of the Japanese stock market, finally closed at a new all-time high, above the December 1989 record. So far this year, the index has rallied by around 20%. Regaining this level has been very difficult for Japanese markets, which have taken decades to return to these highs.

Investors still have vivid memories of the crisis the country went through in the 1990s, known as the “lost decade”: the stock market crash in 1989, followed by the bursting of the real estate and credit bubble. After a five-fold increase in the Nikkei 225 index between 1980 and 1989, a crash at the end of that year caused its value to fall by 40%, a slump that reached 63% over two years.

Real estate values had multiplied in the decades prior to the bursting of the bubble. The government deficit soared during the 1990s and prices fell across the country: they did not reach the 1990 level again until 2007. In 1997, banks that had already been faltering for some years went bankrupt.

This was followed by decades of very weak growth, low inflation and loose monetary policy, a phenomenon that has been called “Japanization of the economy”.

In all those years, it has been China that has captured the attention of investors. But now, it is the Asian giant that is facing problems in the real estate sector, a slowdown in exports and a fall in foreign investment, among other problems, while Japan is becoming more attractive for investors.

One of the advantages is the attractive exchange rate. “The Japanese exchange rate has been falling for many decades, but even within that trend, it has gone beyond of what is reasonable relative to macroeconomic conditions. Investors have seized the moment to enter the currency,” notes Alberto Matellán, chief economist at MAPFRE Inversión.

The country also has a different monetary policy than other major markets, with interest rates at negative -0.1%, much lower inflation due to structural reasons and higher productive investment. “These factors place the country in a much better competitive position than its Asian competitors. Its outlook is quite positive and right now, it’s a very attractive market,” Matellán adds.

Jonathan Boyar, head of Boyar Value Group and advisor to MAPFRE AM’s US Forgotten Value Fund, agrees, and believes that the strength of the Japanese market is quite rational, and “nothing like the bubbles the country experienced in the late 1980s and 1990s.” And he is not alone.

Berkshire Hathaway, Warren Buffett’s investment firm, began buying shares of Japanese companies as early as July 2019 and it currently has positions in five Japanese companies: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo, with a 9% share in each case. Last year alone, and also thanks to the depreciation of the yen, its position appreciated 61% in dollar terms.

In its latest quarterly letter, the firm adds that they only distribute about one-third of their profits to shareholders, allowing them to use the remaining sums to build up their businesses or buy back shares. Added to this, the managers of the five have been “much less aggressive” about their compensation than is normally the case in the United States.

In addition, Berkshire Hathaway is not ruling out the possibility that it could gain global alliances by investing in these five companies, which are large, well-managed and respected in their respective sectors.
 

A fragile economy

 
The Japanese economy is not performing as well as its markets. The country recorded growth in 2023 of 1.9%, sustained by the good performance in the first half of the year, which was followed by two contractions in subsequent quarters.

In assessing short-term risks to the Japanese economy, MAPFRE Economics, MAPFRE’s research arm, is highlighting the potential for sovereign debt problems. Moreover, uncertainty persists as to whether emerging raw material exporting economies will achieve price stability and economic growth simultaneously.

“Overseas developments will influence the Japanese economy, and there is uncertainty surrounding raw materials, with uncertain movements in both directions,” says MAPFRE Economics in its “2024 Economic and Industry Outlook.” MAPFRE’s Economic Research is forecasting growth of 0.9% for this year and 1% for next year, with inflation of 2.2% and 1.7%, respectively.

In addition, Boyar notes that Japanese corporate earnings have been good, unemployment remains very low and monetary policy is still fairly loose, with interest rates at -0.1%.