Japan Is Back: It Looks Real This Time
By CRAIG KARMIN
November 27, 2005
Over the past 15 years, no stock market has been more frustrating for investors than Japan's. Despite periodic rallies during the 1990s, the Nikkei Stock Average lost an incredible 80% of its value from its peak in 1989 through April 2003.
But Tokyo stocks now are enjoying their third up year in a row, with the Nikkei ahead 29% this year in terms of yen. Japan is the best performer among the world's major developed markets so far in 2005.
While there are still some market watchers who fear they will once again be disappointed by the Japanese market, many analysts who had dismissed previous signs of an economic resurgence in Japan are suggesting that this time is different.
"There have been years when Japan was the best stock market, and then the next year, it was the worst," says Nigel Emmett, a managing director in international equities for J.P. Morgan Asset Management. "We now think we're in the early stages of what could be a five-to-10-year positive story for Japan."
A Huge Market
The fate of the Tokyo market affects many U.S. investors, because mutual funds that spread their money among world markets typically have a significant slug in Japanese stocks. The Japanese stock market joins the U.S. and the U.K. as the world's largest in the value of shares outstanding, and the Tokyo market represents about a quarter of the stock benchmarks followed by foreign-stock funds investing broadly outside the U.S.
Cameron Umetsu, senior economist for Nomura Securities, observes that after years of corporate restructuring, Japanese company profits are up, and both business and consumer confidence are rising steadily. "This shows that Japan can be more resilient even in the face of slowing global growth," he said at a recent meeting with clients in New York.
After years of tepid attempts at structural changes to the economy, analysts say that Prime Minister Junichiro Koizumi's landslide election victory in September suggests the public is ready to embrace more substantial economic reform. That could include steps to privatize the national postal service, which has served as a depository for much of Japanese savings, potentially giving a lift to the Japanese stock market.
Yet for all the positive developments, some think Japan's stock-market rally may have gone too far, too fast. A pronounced economic slowdown in either the U.S. or China -- Japan's most important export markets -- probably would hurt stock-market sentiment in Japan, even with a sounder domestic economy. Some investors also fear in trying to narrow Japan's growing budget deficit, the government could repeat past policy mistakes, such as in the mid-1990s when it raised taxes too soon and choked off an early-stage recovery.
Many mutual-fund advisers say the best way for most investors to get Japan-stock exposure is through international-stock funds, which invest in many countries.
But there also are more than 30 Japanese companies that have shares listed in New York, including big names such as Sony, Toyota Motor and Canon; these so-called American depositary receipts are quoted in dollars and the companies must meet the same financial-reporting requirements as U.S. firms.
Research firm Morningstar Inc. lists about 20 mutual funds that concentrate on Japanese stocks, including Matthews Japan Fund (MJFOX), Fidelity Japan Fund (FJPNX) and Fidelity Japan Smaller Companies Fund (FJSCX). Japan funds are up an average 19.53% this year through Wednesday.
Dedicated Japan funds tend to charge slightly higher management fees than the average international-stock fund. But for people who are bullish on the country's prospects, they may be the best way to go.
Some funds focus on the country's largest stocks, while others invest more widely. "The larger stocks are not necessarily where you'll find the best growth prospects in Japan," says Campbell Gunn, manager of T. Rowe Price Japan Fund (PRJPX), where more than half of the 80 stock holdings are small or midsized companies.
There are also exchange-traded funds -- baskets of securities that track an index like an ordinary mutual fund, but trade on exchanges like stocks. Barclays Global Investors offers the iShares MSCI Japan Index Fund (EWJ), which invests in a basket of large Japanese companies and charges fees lower than most mutual funds. The fund is up 16.12% year-to-date.
The Currency Effect
The average 2005 gains achieved by the Japan funds are clearly lower than those of the Nikkei and a major reason is fluctuating foreign-exchange rates. The surprising strength of the dollar, which has risen 17% against the yen this year, has taken a big toll on Japanese-stock returns for U.S.-based investors. Since most Japan-oriented funds don't hedge their portfolios -- that is, they don't take steps to protect their funds against swings in the currency -- the weaker yen cuts into returns when local Japan prices are translated into dollars. In dollar terms, the Nikkei is up 10% so far this year.
Further weakness in the yen could continue to erode the Japan funds' returns. But a yen turnaround would enhance any stock-market gains for investors in the U.S. Many fund managers not only think that the yen looks undervalued but count Japan as their favorite stock market, according to a new world-wide survey of 290 fund managers from Merrill Lynch.
Some U.S. fund managers favor Japanese companies best positioned to take advantage of a resurgence in domestic demand, such as retailers.
Mr. Emmett at J.P. Morgan thinks Japanese banks and financial companies look particularly attractive because many have taken steps to clean up their bad loans and the managements are making more of an effort to pay attention to shareholders. "Bank stocks look undervalued," he says. "They could conceivably be good performers for a long time."
While sales of Japan funds to U.S. investors have been brisk this year, investors in Japan haven't rushed to buy their local stocks. Still, there are signs of change, as some Japanese individuals begin to put fresh money into stocks.
Large Japanese pension funds remain big sellers. Most analysts suspect these institutions are still shell-shocked from the long and destructive bear market. But Dominic Freud, an international fund manager at OppenheimerFunds, suspects that may change now that this is the third consecutive year in which Japanese stocks have outperformed bonds.
With Japanese interest rates still around zero, stocks could continue to beat bonds, he notes. "We may be at a psychological tipping point," he says, "where Japanese funds reassess the stock market."
online.wsj.com |
