News Archive : Japan Real Estate

Tuesday, November 15, 2005

The morning sun rises again on Japan

Site URL:
International Investor The morning sun rises again on Japan

by Michael Trachtenberg
Daily Staff Writer
Tufts Daily
November 14, 2005

The nation that many predicted would one day surpass the United States as the globe's biggest economic force was dealt a harsh blow when its stock market crashed in 1989. A subsequent collapse of the real estate market, a failure of the banking system as a whole, and lagging economic growth has left little room for optimism in the Japanese capital markets during the past 16 years.

Times are changing. For the first time in a long while, investors are putting their faith in Japan. The Nikkei 225, an index composed of Japan's top 225 companies, has risen in value over 20 percent this year. Over the same period, the Dow Jones has dropped in value nearly 3 percent and the S&P 500 has remained virtually unchanged.

Most of the demand for shares of Japanese corporations is coming from outside the country. One quarter of all shares are owned by foreign investors. While a lack of domestic confidence in the markets is hardly a positive sign, Chris Wood, the chief Asian equity strategist at Asian Investment Bank CLSA, argues that as the market continues to rise, the Japanese will eventually gain the confidence to begin investing. If they do, a sudden surge in demand could drive prices even higher.

There are several causes for this market optimism. Corporate earnings are steadily rising, banks have increased profitable loans while lowering the number of bad loans, and more consistent GDP growth have all contributed to greater investor confidence.

Real estate has not recovered as soundly. During the first half of this year, residential real estate in Tokyo rose in value - the first time in 15 years. But land value fell for the rest of Japan - although at a slower rate than before. This may not seem like terrific news, but with the current positive financial situation of corporations, it may just be a matter of time before real estate becomes a viable investment.

There is still one major lingering issue in Japan: deflation. In order to encourage inflation, the Bank of Japan has severely limited interest rates. Low interest rates have resulted in extraordinarily low yields for those wishing to save their money in Japan. With a yield of less than 1.7 percent, the Japanese ten-year government bond remains extremely unattractive to locals as well as foreigners. The ten year government bonds of both Britain and the United States yield approximately 4.5 percent.

The result has been the Japanese converting their yen into the currencies of other nations in order to receive higher yields. Subsequently, demand for the yen is not high, leading to its devaluation among other currencies. This is bad news for internationals whose investments in the Japanese stock market are producing smaller real returns than the market indicates. The Nikkei 225 has risen in value only 6 percent in terms of the dollar this year.

There are quite a few ways for one to invest in Japan. There is one exchange traded fund (Ticker: EWJ) and many mutual funds. Nearly all of these funds do not beat the market, but there are a couple of exceptions. ProFunds UltraJapan Inv (UJPIX) and ProFunds UltraJapan Svc (UJPIX) have had extraordinary returns, each rising in value nearly 40 percent since the beginning of the year. These two funds are extremely volatile and risky. More conservative funds, with results more in line with the market, include Fidelity Japan (FJPNX) and T. Rowe Price Japan (PRJPX).

Considering the tumultuous past 16 years, it makes sense to view this bull market skeptically, especially considering the economy's lingering problems. But one cannot deny the slow but steady recovery of the Japanese markets. The current market strength is primarily based on quality earnings and balance sheets, two things lacking 15 years ago. If Japanese corporations can continue to run themselves efficiently, and if the Bank of Japan continues to lead the economy in the right direction, there is good reason to expect this bull market to continue.