This article is a guest contribution by Mark Mobius, Vice-chairman, Franklin Templeton Investments.
On a recent trip to Japan, I stopped in Tokyo and one of the questions that journalists often asked me was why Japan was lagging behind its Asian neighbors? With the spotlight on sluggish growth in developed economies, it seems that everyone is back to moaning and groaning about the Japanese economy. A modest 3% GDP growth is expected in Japan this year, compared to a disastrous 5% shrinkage of the economy in 2009.[1] Japanese exporters say they are hurting from a strong Yen while the importers are having a field day. Back in 1990, one US Dollar bought 155 Yen but now it will buy less than 90 Yen.[2] That’s a big change. Of course when I first worked in Japan in 1960, one US Dollar would buy me 360 Yen! This was around the time when Sir John Templeton first started investing in Japan, then considered an emerging market in Asia.
While it’s true that the Nikkei 225 Index (JPY) has fallen from a high of 25,000 in 1991 to a low now of less than 10,000, bargain hunters would say that this is beginning to make the Japanese stock market look reasonably cheap.[3] The average dividend yield for Japanese company shares is now 2% while the average price/earnings ratio has come down from a 1994 high of over 70x’s to a more attractive 13x’s.The price-to-book value, another measure of value, has retreated from a 1991 high of almost 3x’s to the current lows of 1x’s.[4]
And for Japanese savers, it doesn’t help that interest rates remain very low in Japan with the policy rate at only 0.1%. Hence, savers do not get much return by putting their money in the bank and are searching foreign exchange investments to get a higher yield. But inflation is now in negative territory with the consumer price index at almost -1% so the real yield is positive.[5]
I spent some time reflecting on the question of Japan’s economic malaise and made a parallel between China today and Japan in the 1960s and 70s. China – one of the leading emerging markets of this decade – is now where Japan was in the 1960s and 1970s when the Japanese economy was taking off, thanks to innovation. But Japan also stands to benefit from China’s rise because one of the most important changes taking place in Japan today is the strengthening of its ties with China. The U.S. is no longer Japan’s chief customer. In 2009, 19% of Japan’s exports went to China while only 16% went to the U.S. and 13% to the European Union (EU), and perhaps more importantly, 22% of Japan’s imports came from China, while only 11% are from the EU and 11% from the U.S.[6] Recent trends show that China will become even more dominant in the Japanese export/import picture going forward.
At the same time, the stronger Chinese connections are raising concerns such as China’s use of its more than US$2 trillion foreign reserves to buy Japanese government bonds. Of course, the Japanese are no slouches when it comes to building up foreign reserves. Japan is second in the world, after China, with about US$1 trillion in foreign reserves.[7]
This question continued to play in my mind as I traveled to Osaka from Tokyo – and I’m saving my conclusions for my next blog as I’ve got to get onto a plane to Romania – so stay tuned for an update!
[1] Source: EIU, as of August 31, 2010. [2] Source: Factset, as of August 31, 2010. [3] Source: Nikkei 225 Index; (based in Japanese Yen); Factset as of end-August 2010. [4] Source: MSCI Japan index, as of August 31, 2010. [5] Source: EIU, as of August 31, 2010. [6] Source: EIU, for the year 2009. [7] Source: EIU, IMF as of December 31, 2009.
