The tipping point was 1990. In the 15 years that followed, amid crashing stock and property markets and mountains of debt, scores of corruption scandals, vast government deficits and stagnating growth, Japan mutated from being a giver of lessons to a recipient of lectures (which were all but ignored by the politicians).
It's hard to say that Japan isn't now cheap on a valuation basis -- the market sells at book value and at half of sales. In fact, one can make the case on valuation alone that the Nikkei is as cheap as the U.S. market was at its generational low in March 2009.
There is both a mystical and fundamental side to the bull case for Japan.
There is the mythology in Japan that the major earthquakes that have haunted the country have presaged major cultural and social changes:
- The 1855 Tokyo earthquake marked the beginning of the end of 200 years of isolation; it was followed by a Japan that was more industrial and open to the world.
- The 1923 quake signaled a new age of aggressive militarism and an obsession with Asian conquest that culminated in World War ll.
- The Kobe earthquake of 1995 is thought by many to have signaled the end of the postwar industrial boom and marked the beginning of recession and deflation.
- Expectations are low or nonexistent for the Japanese economy to turn around. Economic dislocations caused by the earthquake have threatened near-term GDP forecasts, but I reminded viewers that the U.S. stock market's generational low was achieved under similar economic uncertainty. Moreover, there is widespread optimism that the worldwide recovery will be smooth and self-sustaining -- as such, it could facilitate a meaningful improvement in Japanese exports.
- Since the devastating earthquake and tsunami on March 11, the Japanese market is down by about 7% while the Morgan Stanley World Index is up smartly.
- The condition of the Fukushima Daiichi nuclear power plant has been stabilized.
- The electrical supply outlook has improved. According to Goldman Sachs, Tokyo Electric Power Company's electricity output by this summer should not force large-lot users to restrict electricity usage.
- The Japanese government appears to be implementing fiscal stimulus that is reasonable in scale and timely in policy. The Kan administration has submitted a first fiscal-year 2011 supplementary budget, and a second supplementary budget is expected by the end of June.
- Japan's monetary policy is market-friendly/economic-friendly. Base money growth has surged since the March nuclear accident. In mid-March, the Bank of Japan increased its asset purchase program, and in early April, the Bank of Japan announced a new loan program geared toward assisting financial institutions in their response to the likely increase in reconstruction funding demand.
- Finally, the post-recovery future for Japan will hopefully accelerate reforms (e.g., free trade agreements). It might also lead to accelerated production diversification (and more M&A activity) and rising demand for alternative energy technologies.
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