Tokyo stocks: this time could really be different

February 8, 2013

By Robert Cole

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

Once bitten, twice shy. In fact, investors in Japan have been bitten many times by the seductive notion that the land of the rising sun is emerging from its bear-market night. They would be forgiven for shying away this time.

The temptation is there, though. The MSCI Japan index is up by a third since mid-November, helped by the yen’s steep decline against the dollar. Investors are drawing confidence from the promise of reflation by the new government of prime minister Shinzo Abe. Starmine data suggests that Japanese corporate earnings are on course to strengthen by 22 percent over the coming year – nearly twice the global average.

An analysis of valuation metrics also offers convincing reasons to be cheerful about Japanese stocks. The forward-looking price earnings ratio for the MSCI Japan index sits just below 14. That is a little higher than the equivalent for Europe and about the same as for the United States. But it is less than global average p/e ratio for the last two and a half decades. And today’s multiple is way below the Japanese average for the last 25 years — which sits at a princely 30. It is also lower than nearly 90 percent of all weekly readings for Japanese stocks since 1988.

Dividend yields tell a similar story. Thomson Reuters Datastream data show that Japanese shares pay an average 2.2 percent at present. For nearly two-thirds of the period since 1988, they have yielded less than 1 percent.

How do current circumstances compare with previous points of hope? One of the biggest false dawns broke in May 2003: the MSCI Japan index more than doubled over the subsequent four years before sliding all the way back. At the start point, however, Japanese equities were more expensive than they are now – trading on an earnings multiple of 16 and yielding 1.2 percent.

Investment decisions can rarely be distilled into an exact, numerical science. Abe’s reflationary promises may fade. Companies may fail to take advantage of the cheaper yen. There is, however, good evidence in the valuation data to suggest that now is a good time to buy Japanese equities. This time really might be different.


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