Hi Maurice, I do not know the aggregate P/E of the Japan equity market, and same for the US market. For the few shares I follow, the P/E on 2001 earnings estimate are all above 30, and in one case, Sony, above 1,000. On 2002 earnings estimate, Sony is at 48, Toyota at 26.
The reason I do not pay attention to the Japan P/E ratio is because, at an interest rate of effectively zero, the stocks by necessity would trade at a high P/E and high multiple of cash flow (SNE at 18 x; Toyota @ 13x on 2001 cash flow). These are certainly much more reasonable than what was before, but compelling they are not yet, especially if the world slips into synchronous recession resulting in further demand shortfall for Japanese exports.
Borrowing JYen to buy non-Japan assets maybe OK; to buy Japan assets maybe OK. Taking my USD to switch to JYen and then to buy Japan assets is definitely not OK.
<<P:E will dictate the bottom>>
Preservation of purchasing power of the currency will also impact the relative compelling-ness of buying Japan, as it will impact the same for USA.
Japan's job for the foreseeable future is to surrender its standard of living via deflation of assets and inflation of imported goodies via devaluation; capital and manufacturing outflows; capital, banking, insurance and pension losses.
Given the unnatural interest rate in Japan, dislocations have probably caused the formation of yet more bubbles ... just like a big ship that got hit by torpedos, the sinking takes awhile.
In a short sentence ... I am in no hurry to buy Japan, until DJIA and S&P blows up, and Nasdaq wimpers no more.
Chugs, Jay
feer.com
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SHROFF: JAPAN
Beastly Bonds
By Jennifer Schultz
Issue cover-dated July 19, 2001
The slow reform of the Japanese government-bond market is driving foreign investors away and insiders say some may never return. The government can ill-afford to lose investors now. With public debt at an all-time high, the Ministry of Finance is trying hard to figure out how new debt can be digested smoothly. Overseas investors currently hold about ¥25 trillion ($201.6 billion) in Japanese government bonds--a little less than a year's worth of new issuance.
Over the past two years, the Ministry of Finance has attempted to increase foreign participation in the JGB market. Low interest rates and high taxes on returns have given foreign investors little incentive to buy JGBs. Currently the yield on 10-year JGBs is just 1.3%. To lure them into the market, the government passed a law in 1999--and amended it in 2001--to give overseas investors an exemption on the up to 15% withholding tax they had to pay on interest income.
But because of the tax authority's interpretation of the law, hundreds of overseas funds effectively don't qualify for the exemption. The problem has come to a head because the "grey market" in JGBs--a loophole that allowed foreign and domestic investors to buy tax-free government bonds under the name of a qualified brokerage firm--effectively ended in June.
As a result, frustrated investors representing tens of billions of dollars in the JGB market have unwound their positions. The tax-exemption issue has turned into a public-relations fiasco for the ministry, exposing a market that is neither transparent nor simple for overseas investors to navigate. While the ministry says it's working with the Bank of Japan and the tax authorities to push through reforms, red tape, an exceptional amount of legal paperwork and a lack of clarity on key issues have effectively restricted the JGB market.
"Some of the more adamant accounts are saying to hell with JGBs," says a Tokyo-based bond salesman. Fund managers are advising their institutional clients to drop JGBs from their bond portfolios and if that happens there is no way that they can ever come back to the market, he says. According to a recent Credit Suisse First Boston report, overseas investors rushed to sell their JGBs ahead of the grey-market closure and switched to Euroyen bonds and JGB futures. Neither is subject to the withholding tax.
The surge of buyers in the Euroyen market has made the yen-denominated bonds issued offshore by both Japanese and foreign borrowers that much more expensive. Still, some investors find it a more attractive option than paying taxes on JGBs. "We are basically expecting Euroyen spreads to strengthen or to outperform JGBs even more than they already are," says the bond salesman. "But the accounts aren't buying out of value. They know that what they are buying is a ludicrously rich bond. They have no choice."
Of the overseas investors who have decided to take the tax hit and buy JGBs, many have switched to short-term, low-coupon bonds, which minimizes their tax bill. (These are mostly large investors with more than $1 billion in the market.). As a result, low-coupon bonds are now more expensive, says Hiroetsu Yasumoto, head of JGB trading at UBS Warburg in Tokyo.
Japan is the only member of the Group of Seven leading industrialized nations that charges a withholding tax on interest payments on its government debt. Most countries have abolished the tax or found ways to exempt foreign investors. So when the Japanese Diet passed a law in 1999 that was to put an end to taxing foreigners' income on bonds, a happy ending seemed to be in sight.
But once the law was passed, Japan's tax authorities began to worry domestic investors would try to evade local taxes by buying government bonds through foreign intermediaries. So they asked foreign investors to deposit their bonds with a local bank to qualify for the tax break--and held the bank accountable for identifying tax evaders. But because some local banks are considered a credit risk and because most major investors use global custodians to hold their assets, this option proved untenable.
As investors' impatience grew, the government amended the law in March. Under the new system, foreign investors are exempted from the tax if the JGBs are deposited with a global custodian authorized as a "qualified financial intermediary" by the tax authorities. The Ministry of Finance says 20 major global custodians have been approved as qualified financial intermediaries. But the number is a red herring.
Global custodians represent a pool of assets from around the world, including mutual funds, pension funds and unit trusts. While the global custodian may qualify for a tax exemption, that status doesn't automatically extend to all of its customers. The problem, they say, is the National Tax Administration's legal definition of a fund. At the moment, it doesn't recognize fund structures without corporate status in Japan, such as unit trusts. "I certainly don't see renewed enthusiasm to be launching into the market in the short-term," says Colin Luxford, managing director of fixed income Asia-Pacific at Merrill Lynch in Tokyo. "There is going to be a quieter period ahead until they see how things go."
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