Why Japan equities have underperformed for the past decade?

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Houston101
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Why Japan equities have underperformed for the past decade?

Post by Houston101 » Sat Mar 19, 2011 12:12 pm

I am really curious as to why Japan equities have underperformed for the last 5 / 10 year period?

While Japan is different from U.S. it is quite similar in many ways (well regulated equities market, developed economic powerhouse, companies that dominate the world).

Can someone please shed some light or point to an article that might explain this?

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Post by White Coat Investor » Sat Mar 19, 2011 12:30 pm

5-10? How about 20? That's the real mystery. I'd just blow off 5.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Post by Houston101 » Fri Mar 25, 2011 8:24 pm


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Post by alec » Fri Mar 25, 2011 8:39 pm

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

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Post by Houston101 » Fri Mar 25, 2011 9:02 pm

The GDP growth rates are quite similar between US & Japan but the stock market returns are not.

http://www.google.com/publicdata?ds=wb- ... ry:JPN:USA

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Post by Imperabo » Fri Mar 25, 2011 9:10 pm

The performance for past decade or so has been quite similar. The reason for the poor performance in Japan since its peak in 1989(?) is that the entire Japanese stock market was priced like booming tech company. It wasn't justifiable in any case, and with the ensuing economic stagnation prices have since collapsed.

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Post by Manbaerpig » Fri Mar 25, 2011 10:24 pm

Japan's bubbles all basically inflated and popped long before ours, dont be terribly surprised if we follow suit

An analogy is looking at Mars and the apparent canals and all that, saying "hey what happened here?" they discovered capitalism :)

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Post by natureexplorer » Fri Mar 25, 2011 10:41 pm

Could it be that equities are risky?

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Re: Why Japan equities have underperformed for the past deca

Post by billjohnson » Fri Mar 25, 2011 10:41 pm

Houston101 wrote:I am really curious as to why Japan equities have underperformed for the last 5 / 10 year period? Can someone please shed some light or point to an article that might explain this?
1. Debt issues
2. Fiscal and Monetary policy
3. Aging population

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Post by Karamatsu » Sat Mar 26, 2011 6:00 am

The simple answer, I suppose, is that, except in extreme situations, share prices in any equity market go up if and only if there is demand for shares. That is, they have little or nothing to do with the performance of the underlying companies, or even the economy as a whole, but just demand. And in Japan's case, there is no demand.

The only significant net buyers of Japanese equities over the past ten years have been foreigners. Japanese individuals, banks, and companies have all been net sellers, which is a pretty odd situation, when you think about it. Japanese are, on average, simply not interested in their own equity market.

So for ten years foreigners have been buying in, waiting for the moment when everyone else will decide that J equity shares are worth having, but it's never happened. And without domestic demand there is no one for the foreign investors to sell to except each other, so it becomes a kind of echo chamber, pushed this way and that by whatever rumour or FT article was popular that day. This leads me to think that the equity market in Japan may serve fundamentally different functions from the one in the US, but I'm not exactly sure what they are. Perhaps it's just a shell game for brokerage houses to make money with?

One other factor may be that there is less need for Japanese to take risks in the equity market because the retirement insurance and national health care are seen as adequate. The US market benefits from the political decision not to provide real retirement security [not meant as a political comment -- just pointing out a basis of comparison], and this forces Americans into the casino. But if someone doesn't have to take that risk, why should they? Basic investment theory, when you get right down to it.

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Post by joruva » Sat Mar 26, 2011 7:09 am

The nail that sticks up gets hammered down.

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Post by bluto » Sat Mar 26, 2011 7:47 am

Karamatsu wrote:The simple answer, I suppose, is that, except in extreme situations, share prices in any equity market go up if and only if there is demand for shares. That is, they have little or nothing to do with the performance of the underlying companies, or even the economy as a whole, but just demand. And in Japan's case, there is no demand.

The only significant net buyers of Japanese equities over the past ten years have been foreigners. Japanese individuals, banks, and companies have all been net sellers, which is a pretty odd situation, when you think about it. Japanese are, on average, simply not interested in their own equity market.

So for ten years foreigners have been buying in, waiting for the moment when everyone else will decide that J equity shares are worth having, but it's never happened. And without domestic demand there is no one for the foreign investors to sell to except each other, so it becomes a kind of echo chamber, pushed this way and that by whatever rumour or FT article was popular that day. This leads me to think that the equity market in Japan may serve fundamentally different functions from the one in the US, but I'm not exactly sure what they are. Perhaps it's just a shell game for brokerage houses to make money with?

One other factor may be that there is less need for Japanese to take risks in the equity market because the retirement insurance and national health care are seen as adequate. The US market benefits from the political decision not to provide real retirement security [not meant as a political comment -- just pointing out a basis of comparison], and this forces Americans into the casino. But if someone doesn't have to take that risk, why should they? Basic investment theory, when you get right down to it.
Very nicely explained.

And at the other end of the spectrum...
The nail that sticks up gets hammered down.

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Post by SP-diceman » Sat Mar 26, 2011 8:14 am

Remember that all these questions of valuations depend on your
starting point and the valuations at that starting point.


Since the 2000 top, the NASDAQ composite (tech bubble) is down about 40%,
The Nikkei Index is down about 53%.


During the 2003-2007 bull market the SP-500 was up about 74%,
The Nikkei Index was up about 133%.


Thanks
SP-diceman

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Post by William Million » Sat Mar 26, 2011 8:24 am

Karamatsu wrote:The simple answer, I suppose, is that, except in extreme situations, share prices in any equity market go up if and only if there is demand for shares. That is, they have little or nothing to do with the performance of the underlying companies, or even the economy as a whole, but just demand. And in Japan's case, there is no demand.
True in the short run but in the longer run the performance of the underlying company matters a great deal to share price. That is, if a company increases earnings year after year, it's share will (eventually) go up.

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Post by jimkinny » Sat Mar 26, 2011 8:59 am

Per John Bogle there are three components of a markets return. The first two are investment returns: dividends and earnings growth. If earnings grow by 3% and the average dividend is 3%, over the long term, the market returns will be 6% plus whatever speculative returns (pos/neg) that are present. I do not know or care enough to investigate the actual market earnings of the Japanese companies and the dividends paid. Maybe the lack of growth in the Japanese stock market is "negative" speculative return (this is how I think of fear and maybe reversion to the mean after a huge bubble)), maybe the cause is economic policies or demographics. This has nothing to do with my asset allocation. I have an international stock allocation and will stay at that percentage for the long term.

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Post by fluffyistaken » Sat Mar 26, 2011 9:25 am

Japan's stocks were hugely overvalued at their peak in 1989 with P/E of around 60 -- almost twice as high as US P/E at the height of the 90s bubble, and about four times higher than "normal". So they were due for a huge drop which is exactly what happened. Now their P/E are reasonable and P/B actually seems cheap (see http://www.bogleheads.org/forum/viewtopic.php?t=71335 ).

So there's no reason to think the future will be bad for Japan equities. As all bogleheads know, GDP growth or lack thereof has little or nothing to do with stock returns ;)

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Post by dodonnell » Sat Mar 26, 2011 10:51 am

Vanguard's Pacific (which is ~2/3 Japan) currently has a dividend yield more than twice Vanguard's S&P 500.

Even with the earthquake's recent sell-off, Pacific (VPACX) beats SP500 (VFINX) in total return over the last 10 years by ~2% annualized.

... a reasonable addition to a well diversified global equity portfolio?

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Post by yobria » Sat Mar 26, 2011 12:05 pm

dodonnell wrote:Vanguard's Pacific (which is ~2/3 Japan) currently has a dividend yield more than twice Vanguard's S&P 500.

Even with the earthquake's recent sell-off, Pacific (VPACX) beats SP500 (VFINX) in total return over the last 10 years by ~2% annualized.

... a reasonable addition to a well diversified global equity portfolio?
Yes, but that's mostly due to the other countries in the index. EWJ, the Japan only ETF, has a yield of about .7%, and has underperformed the S&P by 3% over the last 10 years, annualized.

Japan is facing a shrinking domestic population, and intense competition from low cost China, etc. After R&D spending, and taking care of their employees (the priorities for many Japanese companies), there just isn't much money left for shareholders.

Nick

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Post by nycll » Sat Mar 26, 2011 1:21 pm

Karamatsu wrote:The simple answer, I suppose, is that, except in extreme situations, share prices in any equity market go up if and only if there is demand for shares. That is, they have little or nothing to do with the performance of the underlying companies, or even the economy as a whole, but just demand. And in Japan's case, there is no demand.
Warren Buffett would disagree with this over a long term horizon.
The only significant net buyers of Japanese equities over the past ten years have been foreigners. Japanese individuals, banks, and companies have all been net sellers, which is a pretty odd situation, when you think about it. Japanese are, on average, simply not interested in their own equity market.

So for ten years foreigners have been buying in, waiting for the moment when everyone else will decide that J equity shares are worth having, but it's never happened. And without domestic demand there is no one for the foreign investors to sell to except each other, so it becomes a kind of echo chamber, pushed this way and that by whatever rumour or FT article was popular that day. This leads me to think that the equity market in Japan may serve fundamentally different functions from the one in the US, but I'm not exactly sure what they are. Perhaps it's just a shell game for brokerage houses to make money with?
This observation might be true but it doesn't really explain the lack of interest for fair valued stocks.
One other factor may be that there is less need for Japanese to take risks in the equity market because the retirement insurance and national health care are seen as adequate. The US market benefits from the political decision not to provide real retirement security [not meant as a political comment -- just pointing out a basis of comparison], and this forces Americans into the casino. But if someone doesn't have to take that risk, why should they? Basic investment theory, when you get right down to it.
This argument is completely wrong. All people need to allocate their investment between stocks and fixed income to meet their life time consumption needs. The allocation percentage varies among different people. But the existence of annuity like government provided pension and social security REDUCES the need to allocate retirement saving into bonds. I am only discussion the "rational" allocation decisions, not the herd behavior which suspect is the root cause of the phenomenon. Poor returns discourage new investments which leads poor returns...

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Japan = Aging Population

Post by nycll » Sat Mar 26, 2011 1:25 pm

Anyone who is interested in Japan should study her aging population.

Here is a good start: http://www.economist.com/node/17492860

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Post by nycll » Sat Mar 26, 2011 2:01 pm

jimkinny wrote:If earnings grow by 3% and the average dividend is 3%, over the long term, the market returns will be 6% ..
should be 3%, since earnings include dividends.

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Re: Japan = Aging Population

Post by yobria » Sat Mar 26, 2011 2:17 pm

nycll wrote:Anyone who is interested in Japan should study her aging population.
Also true for China.

Nick

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Post by Karamatsu » Sun Mar 27, 2011 7:26 pm

All people need to allocate their investment between stocks and fixed income to meet their life time consumption needs.
Why? I don't think most Japanese would agree, nor would academics like Zvi Bodie, but perhaps there is a clear reason?

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Post by Specialized » Sun Mar 27, 2011 9:17 pm

Karamatsu wrote:One other factor may be that there is less need for Japanese to take risks in the equity market because the retirement insurance and national health care are seen as adequate. The US market benefits from the political decision not to provide real retirement security [not meant as a political comment -- just pointing out a basis of comparison], and this forces Americans into the casino. But if someone doesn't have to take that risk, why should they? Basic investment theory, when you get right down to it.
Are you saying the Japanese national pension fund doesn't invest in equities?

Also, what happens generally to the price of a Japanese stock when the EPS of the company increases? Does it the stay the same, or like everywhere else, go up?

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Post by nycll » Sun Mar 27, 2011 9:52 pm

Karamatsu wrote:
All people need to allocate their investment between stocks and fixed income to meet their life time consumption needs.
Why? I don't think most Japanese would agree, nor would academics like Zvi Bodie, but perhaps there is a clear reason?
Let's pretend there is only 2 asset classes, stocks and bonds. As long as the preference of an individual's allocation in stocks is more than zero percent, the existence of a generous government annuity (compared to the situation where the social security doesn't exist) will effectively reduce the need for fixed income. I don't know what Zvi Bodie's view in stocks is, but I'd be genuinely surprised if he things a typical person's allocation in stocks would be zero.

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Post by Harold » Sun Mar 27, 2011 9:59 pm

Specialized wrote:
Karamatsu wrote:One other factor may be that there is less need for Japanese to take risks in the equity market because the retirement insurance and national health care are seen as adequate. The US market benefits from the political decision not to provide real retirement security [not meant as a political comment -- just pointing out a basis of comparison], and this forces Americans into the casino. But if someone doesn't have to take that risk, why should they? Basic investment theory, when you get right down to it.
Are you saying the Japanese national pension fund doesn't invest in equities?

Also, what happens generally to the price of a Japanese stock when the EPS of the company increases? Does it the stay the same, or like everywhere else, go up?
In case anyone's curious (as I was) the Japanese Government Pension Investment Fund invests 20% of its ~$1.4 trillion in assets in equities (11% Japanese, 9% foreign).

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Re: Why Japan equities have underperformed for the past deca

Post by saurabhec » Sun Mar 27, 2011 10:51 pm

Houston101 wrote:I am really curious as to why Japan equities have underperformed for the last 5 / 10 year period?

While Japan is different from U.S. it is quite similar in many ways (well regulated equities market, developed economic powerhouse, companies that dominate the world).

Can someone please shed some light or point to an article that might explain this?
It seems to me that Japan is a nation is orderly liquidation mode. They made a decision as a society post their bubble bursting that maintaining a high level of employment and social cohesion was the most important priority. Therefore the growth outlook for most Japanese companies probably hasn't turned out to be that great, and China has given them stiff competition on their low end exports. From what I can see at a superficial level they face a demographic crisis and are culturally unable to allow immigration. The current earthquake is only going to increase the odds of a fiscal crisis at some point given their deficits and debt situation. I don't think Americans should tut tut much because our policy responses have much in common with 1990s Japan.

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Re: Why Japan equities have underperformed for the past deca

Post by Valuethinker » Mon Mar 28, 2011 4:21 am

Houston101 wrote:I am really curious as to why Japan equities have underperformed for the last 5 / 10 year period?

While Japan is different from U.S. it is quite similar in many ways (well regulated equities market, developed economic powerhouse, companies that dominate the world).

Can someone please shed some light or point to an article that might explain this?
If you start a decade at a high PE, then what earnings growth there is goes to lowering PE *not* increasing Price.

Note US stock market has done the same thing over the last 10 years. Basically flat since December 1999.

On the Japanese economy you have:

- the legacy of the 'bubble bust' and falling asset prices - housing and real estate prices are down 60% at least since 1990

- demographics - Japan is the fastest aging society in the world, and there is little (legal) immigration. Japan has a limited state pension system, so pensioners are dependent on their savings-- bad economic news makes the Japanese more cautious

- unemployment - there is little welfare state. Fear of losing their job makes the Japanese extremely cautious spenders and large savers, because they will have to survive on family resources

- shareholder governance - American companies buy back shares, Japanese companies by and large do not. Most Japanese companies aim for financial stability and workforce stability over share price gains-- so they run with large cash balances on their balance sheets (an American management would experience irresistable pressure to buyback shares or to do an LBO)

- Japan was extraordinarily successful as a manufacturing superpower. It still is the G8 country most dependent on manufacturing exports. But that means the Japanese domestic consumer is, in effect, too small a proportion of final demand. It also means the service economy is underdeveloped and with low productivity (the US is almost the reverse).

Also Japanese manufacturers (like Sony) have faced increased competition from Korean, Taiwanese and now Chinese producers. They have not been able to maintain their price/quality premia in many markets.

The main factor in Japan though has been the bubble bust. All assets got improbably overvalued (market on a PE of 50 times etc.) by 1990-- housing, commercial real estate, shares. Once that bust, it takes years, or even decades, for normalcy to return.

(note on most measures, Japanese stocks are the cheapest any major stock market has ever been, similar to US stock market in the late 70s-- single digit PEs, balance sheets stuffed with cash, etc.).

Just on the Japanese government debt, it's important not to take that in isolation. Japanese companies and consumers remain major savers. Japan's government owes a lot of money, but mostly to other Japanese. Hence the extremely low interest rates.

The similarity with the US? That bubble bust, and the possible aftermath.

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Post by Valuethinker » Mon Mar 28, 2011 4:22 am

yobria wrote:
dodonnell wrote:Vanguard's Pacific (which is ~2/3 Japan) currently has a dividend yield more than twice Vanguard's S&P 500.

Even with the earthquake's recent sell-off, Pacific (VPACX) beats SP500 (VFINX) in total return over the last 10 years by ~2% annualized.

... a reasonable addition to a well diversified global equity portfolio?
Yes, but that's mostly due to the other countries in the index. EWJ, the Japan only ETF, has a yield of about .7%, and has underperformed the S&P by 3% over the last 10 years, annualized.

Japan is facing a shrinking domestic population, and intense competition from low cost China, etc. After R&D spending, and taking care of their employees (the priorities for many Japanese companies), there just isn't much money left for shareholders.

Nick
Actually Japanese companies are cash rich. But whereas American companies buy back shares (and borrow money, and buy back more shares) Japanese companies by and large don't.

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Post by Valuethinker » Mon Mar 28, 2011 4:26 am

Karamatsu wrote: So for ten years foreigners have been buying in, waiting for the moment when everyone else will decide that J equity shares are worth having, but it's never happened. And without domestic demand there is no one for the foreign investors to sell to except each other, so it becomes a kind of echo chamber, pushed this way and that by whatever rumour or FT article was popular that day. This leads me to think that the equity market in Japan may serve fundamentally different functions from the one in the US, but I'm not exactly sure what they are. Perhaps it's just a shell game for brokerage houses to make money with?
Very interesting point.

In the 80s and early 90s, a stock went up because Nomura said it should go up. It was a little like the dot com bubble in that retail demand, and japanese fund managers, were basically ignoring fundamentals and going on the Japanese equivalent of George Gilder's latest utterings.

Japan being a society given to collective action, contrarians just got steamrollered.

Whether that is still the case, I do not know.

On a macro level, I think what you have is Japanese getting older, moving portfolios into fixed income, and selling those equities to foreigners.

Your description of the Japanese market is therefore apt: a bunch of foreigners trading equities, Japanese sitting on the sidelines, largely.

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Post by Valuethinker » Mon Mar 28, 2011 4:32 am

Manbaerpig wrote:Japan's bubbles all basically inflated and popped long before ours, dont be terribly surprised if we follow suit

An analogy is looking at Mars and the apparent canals and all that, saying "hey what happened here?" they discovered capitalism :)
The UK canal network (which now has no commercial value, except to run electricity and phone lines, but which is a great national treasure for recreation -- walking boating etc) was built in a similar 'bubble' boom up to the 1830s.

Then we had a railway boom (and bust) leaving London with 14 mainline train stations, each owned by a different railway company-- the largest number of rail terminii in any capital city in the world. (It's down to about 8 now).

It's a striking contrast to electricity, where a 'national grid' was imposed in the 1930s, linking up all the major UK cities-- that was done in part as a war preparation (if there is bomb damage to a line or power plant, with a grid, you can work your way around it). We retain a central national grid operator, even post privatisation (they also own Niagara Mohawk power in NY State, from memory-- UK co is called Transco/ National Grid).

These bubbles and busts are integral to the functioning of capitalism. The market gets excited and overestimates future demand, overinvests, there is a period of mad speculation, then there is a bust when it has the 'Wile E Coyote' moment and looks down.

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Post by Valuethinker » Mon Mar 28, 2011 4:35 am

EmergDoc wrote:5-10? How about 20? That's the real mystery. I'd just blow off 5.
If you start on 50 times earnings, say, and a price to book of 5 times, then to get back to 'fair value' (PE of 12 times, Price to Book of say 1.2-1.4 times) is going to take you a long time.

Either earnings have to go up a lot (they didn't) or prices have to come down a lot (they have).

Japan now looks cheap on most measures. But in the absence of Anglo Saxon corporate governance (shareholders first) it's hard to see a catalyst.

Japan's domestic economic problems are related-- the aftermath of a bubble bust has made everyone very cautious and damaged the financial system. But also have some very Japanese aspects: rapid aging demographics, dependence on exports etc.

It's almost as if the question we should ask is not 'why Japan 20 bad years' as

'why Japan, 40 superlative years before the 20 bad years?'

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Post by Houston101 » Mon Mar 28, 2011 8:29 am

I understand that the bubble popping thing.

Generally the theory for indexing is that as long as the companies are producing earnings and you are selecting the whole market the index portfolio should rise by the risk premium and inflation. The japan equity index show a declining curve even after the bubble. Shouldn’t the index still rise for the risk premium & the rate of inflation?

A consistently falling index would mean that the co.s are defaulting and/or there earnings are falling consistently. The reason it bothers me is that what prevents the indexe portfolio from behaving the same way in the U.S.?

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Post by etarini » Mon Mar 28, 2011 8:49 am

To add to Valuethinker's observations and insights about the Japanese culture, note that the Japanese buy LOTS of their government's bonds.

Everyone knows about their high debt-to-GDP ratio, but not everyone knows that only about 6% of that debt is held by foreigners - in the U.S. the figure is around 50%. After their disastrous stock bubble pop since 1989, and the need for secure retirement investment, it isn't surprising that the Japanese haven't been very interested in stocks.

The U.S. conventional wisdom on investment is that everyman can ride the stock market to a secure retirement; those who avoid the stock market (at least in the accumulation phase) are seen as odd or ignorant.

The Japanese may have a different conventional wisdom about stocks and bonds.

Eric

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Post by Valuethinker » Mon Mar 28, 2011 9:11 am

Houston101 wrote:I understand that the bubble popping thing.

Generally the theory for indexing is that as long as the companies are producing earnings and you are selecting the whole market the index portfolio should rise by the risk premium and inflation. The japan equity index show a declining curve even after the bubble. Shouldn’t the index still rise for the risk premium & the rate of inflation?

A consistently falling index would mean that the co.s are defaulting and/or there earnings are falling consistently. The reason it bothers me is that what prevents the indexe portfolio from behaving the same way in the U.S.?
I have a feeling you've just pointed out that the theory does not work.

The next wave of asset pricing theories will have to take into account valuation. There is too much empirical evidence that that matters.

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Post by Valuethinker » Mon Mar 28, 2011 9:15 am

etarini wrote:To add to Valuethinker's observations and insights about the Japanese culture, note that the Japanese buy LOTS of their government's bonds.

Everyone knows about their high debt-to-GDP ratio, but not everyone knows that only about 6% of that debt is held by foreigners - in the U.S. the figure is around 50%. After their disastrous stock bubble pop since 1989, and the need for secure retirement investment, it isn't surprising that the Japanese haven't been very interested in stocks.

The U.S. conventional wisdom on investment is that everyman can ride the stock market to a secure retirement; those who avoid the stock market (at least in the accumulation phase) are seen as odd or ignorant.

The Japanese may have a different conventional wisdom about stocks and bonds.

Eric
If America had had a 20 year low inflation bear market, and US Treasury bonds were paying 1.5% (at the 30 year), then I suspect American investors would have similar feelings.

But the macro in Japan is interesting. This is an economy stuck in exactly the sort of slump, more or less, that Keynes predicted. Supply and demand are not matching, there is a constant surplus of labour and capital. Hence low capacity utilization and very low inflation.

So the money flies to the low risk asset. Household and corporate savings offset government dissaving, which is caused by low aggregate demand rather than profligacy per se.

It also means Japan is just not a big net borrower, and that puts a different complection on its fiscal crisis.

And so, after the worst natural disaster in nearly 100 years, the Yen *rises*. Despite the losses, despite the Daichi reactors.

Say the government decided to halve the deficit by doubling the VAT. That would still leave VAT far below European levels (10% I think? vs. a European average of 20%). But it would cause a worse slump, by freezing out consumers.

The BOJ would dearly love some more inflation, but it cannot figure out how to create it.

World Central Banks have to intervene to *sell* the Yen to prevent it rising further.

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Post by hsv_climber » Mon Mar 28, 2011 9:25 am

Valuethinker, do you see the latest disaster as being a potential for a catalyst to take Japan out of its slump?

Based on its scale, this disaster might generate a lot of internal demand for manufactured goods, rebuilding projects, and so on.

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Post by Slick8503 » Mon Mar 28, 2011 9:50 am

I'm far from an expert in macro econonomics, so can someone explain to me how a natural disaster that destroys assets like roads, electrical gen/dist., ect. could actually be a catalyst? I understand many companies will benefit from the cleanup and rebuilding but is anything really created? Seems like more of a rob peter to pay paul situation. I just don't see how the net effect would be positive.

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Post by Valuethinker » Mon Mar 28, 2011 9:53 am

hsv_climber wrote:Valuethinker, do you see the latest disaster as being a potential for a catalyst to take Japan out of its slump?

Based on its scale, this disaster might generate a lot of internal demand for manufactured goods, rebuilding projects, and so on.
Unfortunately no.

Kobe did not and Kobe in reconstruction terms was at least 1/3rd as large (maybe 1/2). The government with its fiscal position will be more cautious about spending money this time.

It will be net stimulative (*if* the reactor issue can be resolved without catastrophe) but not a huge filip. The negative impact of the radiation leaks on Japan's psyche and hence confidence should not be understated.

It's a bit like Katrina. Maybe $50bn got spent, but it didn't transform the US economy. $250-300bn over say 5 years will not transform Japan's, either.

Japanese companies will see it as their civic duty to reinvest, so there will be stimulus. But it won't be huge. Some of the assets destroyed will just never be replaced-- many of the villages had aging populations. Think of New Orleans now v. New Orleans pre Katrina-- a lot of the people are just gone.

What would transform the Japanese stockmarket is if Japanese companies suddenly embraced shareholder value.

That I don't judge likely to happen any time soon ;-).

Maybe that's the strongest 'buy Japan' signal you'll ever get, Valuethinker spouting the Conventional Wisdom ;-).
Last edited by Valuethinker on Mon Mar 28, 2011 10:01 am, edited 2 times in total.

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Post by Valuethinker » Mon Mar 28, 2011 9:57 am

Slick8503 wrote:I'm far from an expert in macro econonomics, so can someone explain to me how a natural disaster that destroys assets like roads, electrical gen/dist., ect. could actually be a catalyst? I understand many companies will benefit from the cleanup and rebuilding but is anything really created? Seems like more of a rob peter to pay paul situation. I just don't see how the net effect would be positive.
Economics column of the New Yorker this week (James Surowiecki-- always worth a read) is good on this.

Basically it turns out that, if the economy is at less than full employment, natural disasters are net stimulative.

The government and insurance companies etc. spend lots of money replacing physical assets. Slack resources are used up-- and construction is a particularly good way of creating jobs (and tends to have a relatively low import content ie most of the value is in locally produced materials and labour, not in imports).

That slack resource would not have been used for some other purpose: hence net stimulus.

And those physical assets are more up to date, and therefore more productive. That's the interesting bit.

Remember GDP is a flow, the spending per annum in an economy, it does not measure your stock of physical assets. That's how the US can spend apparently so little on physical assets: the roads, power lines and railways are already there, built long ago.

However in this case, and given the nuclear issue and Japan's sensitivity (having been the only country to incurr an atomic attack, and then Japanese fisherman having died after US nuclear tests in the South Pacific) on the subject, the impact on Japan's psychology, and thus the individual willingness to invest and rebuild, could be quite negative.

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Post by Jack » Mon Mar 28, 2011 11:18 am

etarini wrote:Everyone knows about their high debt-to-GDP ratio, but not everyone knows that only about 6% of that debt is held by foreigners - in the U.S. the figure is around 50%.
Not only is the debt held domestically, about half of it is held by the Japanese central bank which refunds the interest collected to the treasury.

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Post by Slick8503 » Mon Mar 28, 2011 11:20 am

Thanks for the post, Valuethinker. I'll check out Surowiecki. I can understand how rebuilding from a catastrophe could make use of an underemployed workforce, and how that could be stimulative. I guess my next question is what happens next? I guess the hope is that after the rebuilding/updates are completed things will be more efficient and hopefully spur future growth?

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Post by yobria » Mon Mar 28, 2011 11:27 am

Valuethinker wrote:
yobria wrote:
dodonnell wrote:Vanguard's Pacific (which is ~2/3 Japan) currently has a dividend yield more than twice Vanguard's S&P 500.

Even with the earthquake's recent sell-off, Pacific (VPACX) beats SP500 (VFINX) in total return over the last 10 years by ~2% annualized.

... a reasonable addition to a well diversified global equity portfolio?
Yes, but that's mostly due to the other countries in the index. EWJ, the Japan only ETF, has a yield of about .7%, and has underperformed the S&P by 3% over the last 10 years, annualized.

Japan is facing a shrinking domestic population, and intense competition from low cost China, etc. After R&D spending, and taking care of their employees (the priorities for many Japanese companies), there just isn't much money left for shareholders.

Nick
Actually Japanese companies are cash rich. But whereas American companies buy back shares (and borrow money, and buy back more shares) Japanese companies by and large don't.
I haven't seen evidence that Japanese stocks are holding more cash than companies in other countries.

In any case, it's not what they're holding, but what they're generating.

The only way to get cash is to generate earnings, which Japan just isn't generating much of these days.

Nick

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Post by Specialized » Mon Mar 28, 2011 1:36 pm

yobria wrote:
Valuethinker wrote:
yobria wrote:
dodonnell wrote:Vanguard's Pacific (which is ~2/3 Japan) currently has a dividend yield more than twice Vanguard's S&P 500.

Even with the earthquake's recent sell-off, Pacific (VPACX) beats SP500 (VFINX) in total return over the last 10 years by ~2% annualized.

... a reasonable addition to a well diversified global equity portfolio?
Yes, but that's mostly due to the other countries in the index. EWJ, the Japan only ETF, has a yield of about .7%, and has underperformed the S&P by 3% over the last 10 years, annualized.

Japan is facing a shrinking domestic population, and intense competition from low cost China, etc. After R&D spending, and taking care of their employees (the priorities for many Japanese companies), there just isn't much money left for shareholders.

Nick
Actually Japanese companies are cash rich. But whereas American companies buy back shares (and borrow money, and buy back more shares) Japanese companies by and large don't.
I haven't seen evidence that Japanese stocks are holding more cash than companies in other countries.

In any case, it's not what they're holding, but what they're generating.

The only way to get cash is to generate earnings, which Japan just isn't generating much of these days.

Nick
If a company is sitting on a lot of cash and/or increasing its dividend, wouldn't that factor in to a higher share price for that company?
Last edited by Specialized on Mon Mar 28, 2011 3:39 pm, edited 1 time in total.

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Post by SP-diceman » Mon Mar 28, 2011 1:54 pm

Kyle Bass intervewed last year on CNBC:

(Bass testified at the crisis hearings in Washington, about Fannie Mae, Freddie Mac, bank capital, bank leverage and derivatives.)

You have a secular decline in population, and you have a huge funding structure at below market rates. So Japan's weighted cost of capital is only 1.4% and their sovereign balance sheet is much worse than the rest of the developed world. If their cost of capital goes up 250 basis points, their interest expenses of the government will exceed their total government revenue, and it can't even get there [that high].


. In the United States about 57% of our debt is held externally. In Japan 6% of their debt is held externally. 94% is held by the people, the pensions, and the life [insurance] companies. What's happening now with the population decline, all the buyers of their debt are turning to sellers. And the largest pension fund in the world in Japan told the Ministry of Finance in May that they are going to be a net seller from now on. So their buyer's base is disappearing and if they have to go to the international capital markets to raise money, they can't exist. It's an awful social problem for Japan.

Thanks
SP-diceman

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Post by snodog » Mon Mar 28, 2011 4:00 pm

Valuethinker wrote:The BOJ would dearly love some more inflation, but it cannot figure out how to create it.
Or they know how and lack the will to do it. Maybe they're allergic to large quantities of paper and ink?

US may be on same path as governments in general are scared of deflation but they are MORE scared of inflation.

But I'll admit I'm a keynesian with neo-chartalism tendencies. :wink:
Last edited by snodog on Mon Mar 28, 2011 4:23 pm, edited 1 time in total.

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Post by Valuethinker » Mon Mar 28, 2011 4:15 pm

Slick8503 wrote:Thanks for the post, Valuethinker. I'll check out Surowiecki. I can understand how rebuilding from a catastrophe could make use of an underemployed workforce, and how that could be stimulative. I guess my next question is what happens next? I guess the hope is that after the rebuilding/updates are completed things will be more efficient and hopefully spur future growth?
I would encourage you to think that this will be largely temporary. A small positive on the Japanese economy for the next 5 years or so. It's not large enough to change Japan (unless it somehow changed their psychology, and I suspect the whole thing will make them more Japanese rather than less ie more cautious and risk averse).

Maybe the region devastated will grow faster due to the rebuilding.

However the nuclear thing is a complete monkeywrench. Until that is resolved, and if it is resolved without a mass contamination/ meltdown scenario, then all bets are off.

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Post by Valuethinker » Mon Mar 28, 2011 4:16 pm

yobria wrote:
Valuethinker wrote:
yobria wrote:
dodonnell wrote:Vanguard's Pacific (which is ~2/3 Japan) currently has a dividend yield more than twice Vanguard's S&P 500.

Even with the earthquake's recent sell-off, Pacific (VPACX) beats SP500 (VFINX) in total return over the last 10 years by ~2% annualized.

... a reasonable addition to a well diversified global equity portfolio?
Yes, but that's mostly due to the other countries in the index. EWJ, the Japan only ETF, has a yield of about .7%, and has underperformed the S&P by 3% over the last 10 years, annualized.

Japan is facing a shrinking domestic population, and intense competition from low cost China, etc. After R&D spending, and taking care of their employees (the priorities for many Japanese companies), there just isn't much money left for shareholders.

Nick
Actually Japanese companies are cash rich. But whereas American companies buy back shares (and borrow money, and buy back more shares) Japanese companies by and large don't.
I haven't seen evidence that Japanese stocks are holding more cash than companies in other countries.

In any case, it's not what they're holding, but what they're generating.

The only way to get cash is to generate earnings, which Japan just isn't generating much of these days.

Nick
I don't have time to dig right now, but I believe that a majority of Japanese companies are, in fact, net cash on the balance sheet-- a striking contrast to UK/US companies, where orthodox financial theory says a level of debt is desirable.

Japanese companies do make profits, and their profits and their cash flow tend to match: little funny money accounting these days.

if they used that cash to buy back shares, the market would transform. But that is very unlikely to happen.

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