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02/18/2018
JAPAN RISES
By: Janet Johnston
JAPAN RISES

Japan Rises Again

The Land of the Rising Sun is clearly emerging from its “Lost Decade.” We believe that now is the right
time to buy, or increase, exposure to Japanese equities.

After the spectacular crash of Japan’s stock market and property market bubble in 1990, the “Lost Decade” began and became a secular downtrend of “great deflation” lasting 25 years. Both consumers and companies saved excessively, reinforcing this downward spiral. Due to Japan’s corporate culture of lifetime employment and other benefits, companies were slow to restructure and adapt to current market conditions. These behaviors exacerbated the deflationary environment. […]

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Japan Rises Again

The Land of the Rising Sun is clearly emerging from its “Lost Decade.” We believe that now is the right
time to buy, or increase, exposure to Japanese equities.

After the spectacular crash of Japan’s stock market and property market bubble in 1990, the “Lost Decade” began and became a secular downtrend of “great deflation” lasting 25 years. Both consumers and companies saved excessively, reinforcing this downward spiral. Due to Japan’s corporate culture of lifetime employment and other benefits, companies were slow to restructure and adapt to current market conditions. These behaviors exacerbated the deflationary environment.

In 2014, Shinzo Abe, gained control of both chambers of his party, allowing him to implement “Abenomics.” He believed, “escaping deflation was the greatest and urgent issue facing Japan.” His shock and awe campaign of using unprecedented amounts of monetary and fiscal stimulus has been successful in reversing the downward spiral. Abe also focused on structural reform and growth of the private sector. His reelection this fall signals longer term stability of Japan’s monetary and fiscal policies.

Japan is now a major exporting powerhouse, as the country benefits from a weaker Yen, enabling Japanese products to be more competitively priced, as well as benefitting from synchronized global growth.

Japan’s manufacturing sector has restructured, as margins are strong and improving. One of the major contributions to margins may be the implementation of industrial automation through robotics. Japan is also the leading manufacturer of industrial robots, an increasingly significant future technology trend. Earnings at large and small companies are not only beating estimates, but increasing at a strong pace. The growth of smaller companies in Japan is an indicator that there is organic local growth along with the growth of large companies that export. The unemployment rate is healthily below 3 percent. More women between the ages of 25-54 are entering the labor force, helping to offset their older demographics.

Japanese Companies are generating 4x more cash relative to GDP than US companies. Japanese stocks have an average dividend yield of 2% which is 200 basis points over comparable 10-year Japanese bonds. Relative to other major markets like the US, the Japanese market is cheap on both a P/E and valuation basis.

One of the most compelling reasons to own Japanese stocks may be investor sentiment. With the long and seemingly never ending “Lost Decade,” Japanese equities are under-owned both by Japanese institutions and at the local level. Only 10% of Japanese households own Japanese stocks. Over half of Japanese individual assets are in bank deposits earning 0%. As Japanese individuals and institutions become more confident in their country’s future, I would expect cash to come off the sidelines and into Japanese equities.

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