At the end of 1989, the Japanese Nikkei 225 index reached a record of 38,915.87, amid enormous euphoria.
However, 34 years of crisis, natural disasters, deflation and a drop of nearly 80 percent of the index followed.
But last week, to great joy, the Nikkei finally regained its 1989 level, jumping to 39,239.
This recovery was driven by the global boom in semiconductor stocks, but also by a wide range of other more fundamental factors.
These include brokerage Nomura’s forecast that if the United States elects Donald Trump as president in November, there will be a new rift in US-China relations. The beneficiaries would be companies that sell more to the United States than to China, such as automaker Subaru and noodle specialist Toyo Suisan. Their ramen noodles are a favorite among Americans on a budget looking for something delicious.
Majestic: With great joy, the Nikkei finally recovered its 1989 level, jumping to 39,239
Does the Japanese market offer something equally attractive for those seeking diversification? After all, according to one forecast, the Nikkei could advance to 42,000. This prediction has surprised those who have waited more than three decades for the index to recover. But Joe Bauernfreund, manager of the AVI Japan Opportunity Trust, says there is reason to believe “that this time is different.”
He says: ‘The market is not being driven by unsustainably high valuations. It is led by profits and corporate reform. I think we are in the early stages of the reactivation and that there are still more advantages. “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 sclerotic corporate culture.
Under the rules, which Goldman Sachs has described as “a game changer,” companies must use excess cash to benefit 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 say could bring a “transformative” year for the Japanese market – have been accompanied by changes in attitude.
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 was rising, I exceeded my reserves and invested in two Japanese funds: AVI Japan Opportunity and Vanguard Japan ETF (exchange-traded fund).
Part 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 to the optimism expressed by giants like BlackRock, the world’s largest fund manager.
Such has been the rise in confidence that international investors spent £10.5bn on Japanese shares in January.
The country’s famously thrifty citizens have also preferred cash over stocks, despite negative interest rates. This policy could finally end this month, as part of Japan’s normalization process. But Kishida hopes to lure 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 on your Isa, it’s worth doing a little research into the intricacies of its stock markets. For example, the Nikkei may be the most followed index. But its composition is based on share price, rather than company size.
As a result of this strange deal, auto giant Toyota, the country’s largest company, accounts for 1.1 percent of the index. The number one constituent is the much smaller Fast Retailing group, which owns the Uniqlo chain.
These and other complexities mean that I will be investing money not directly in stocks, but in funds, particularly those that focus on digitalization, such as Japan Jupiter Income, one of Bestinvest’s top picks. Other best buy funds include Baillie Gifford Shin Nippon, which focuses on smaller companies, and Man GLG Japan Core Alpha for the adventurous.
In 1989, Sony, founded in Tokyo in 1946, was leading the world in innovation.
In this century, it was supplanted by Apple, founded in 1976.
I bet Japan will make up for lost time.
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