The Nikkei index in Tokyo peaked 12-29-89 at 38,915. Now it’s 23,837 (a 38% loss) despite massive stimulus, gigantic government debt of 600% of GDP (double the US percentage), Quantitative Easing, negative interest rates, and outright purchase of equities by the central bank. Much of the last 30 years it traded near 10,000, a 75% drop. Some real estate in Japan dropped 90% after the 1989 crash and some Japanese mortgages were sold with a 95% drop in price below par. It seems a lot of bubbles result in a long term drop of 75%. The U.S. NiftyFifty stocks of the 1970’s dropped about that much (and never fully recovered when adjusting for inflation, despite the huge 1999 boom).
The Yen is now about 100 to the dollar. Yesterday the central bank of Japan announced new policies and the market’s reaction was to make the Yen go up. Usually when a central bank is trying to stimulate the economy that creates cheap and easy money conditions. These actions should cause foreigners to flee because they would then fear devaluation and inflation. This should have made the Yen go down. It rose from a May, 2015 price of 125 to the dollar despite Japan’s central bank trying massive Quantitative Easing and negative rates to devalue the currency. Many other nations worried the attempted devaluation would be in violation of agreements to avoid big devaluations. Thus it is quite a surprise
The Yen went up against the dollar in the past 12 months from 125 to 108. Meanwhile the Nikkei stock index went down from 20,800 in June, 2015 to 14,900 in February, 2016 and is now 15,928. Based on the Purchasing Power Parity theory (that consumer goods should cost the same everywhere when adjusted for foreign exchange) the Yen was too cheap, possibly as much as 33% too cheap, so it needed to go up to about where it is now. A massive new amount of Quantitative Easing since Abe became Prime Minister in late 2012 caused it to be indirectly devalued. It is tempting for investors to leap to the conclusion that because Japan’s stock market has been low
Japan’s central bank started a policy of negative interest rates on January 29, 2016 and promptly saw the Nikkei stock market decline from 17,500 to 14,900. The Yen actually went up value even though lower interest rates are supposed to make a currency drop in value. The reason why the Yen went up is because it is under priced compared to China’s currency so the Yen needed to rise at least 10% from the lows of 125 in May, 2015. It has now done so. The other reason for the Yen’s rise was because China needs to have a competitive devaluation to improve exports. China is in worse shape because they have a massive debt bubble and a far lower
This morning Japan started a negative interest rate program, which made investors flow into U.S. Treasuries. The 10 year U.S. Treasury yield dropped from 1.99% to 1.91% before leveling off at 1.93%. Negative interest rates don’t work and are dangerous because they could frighten the average unsophisticated consumer or investor and make them feel something bad is going to happen, in which case they would respond with lower consumer confidence and less consumption. They also are bad because they hurt retired people who depend on the yield of bonds and savings. These people will have to reduce consumption and sell off assets like houses and become a renter thus creating a downward spiral in asset prices. In Tokyo there are
The Nikkei stock exchange in Osaka went up lot tonight and was up a lot in the past three years. Should you buy it? The problem is the PE10 ratio is roughly 22 versus a recent high of 27 in the U.S. before stocks went down in the U.S. A fair PE10 is around 15 and a good buying opportunity is around 10 or even better at 8. Thus Japanese stocks are too high. Additionally they fail to meet the very important Buffett-style standards of quality of earnings, return on equity, return on sales, etc. Many Japanese companies can’t even make 5% return on equity and many U.S. companies get over 10%. I believe the ratio of return on equity
During the 1980’s Japan’s companies were rapidly growing and produced globally popular, excellent products. But their economy went into a Soft Depression in 1990 and never really recovered. The problem with investing in Japan both in the 1980’s and now is that their public companies usually have a low return on equity. Instead of focusing on profit margins the goal is to expand market share. A similar situation exists in China, except it is even more extreme, where negative profits may be tolerated in the goal for growth. The situation in Japan reminds me of Amazon which has had minimal profits and instead prefers to focus on spending funds to pursue growth and quality service. Like Japanese companies (or actually,