Japan
The Search for a Silver Lining
Over the last two to three weeks, practically all the major media headlines on Japan have reflected anything from utter discouragement to despair. We also have not found a single bullish broker report on Japan’s economy, stock market or currency. The very few analysts recommending purchase of selected Japanese securities advised, in the same breath, hedging against the yen.
Recent
Headlines
The advent of such an overwhelming consensus after a severe and prolonged decline is almost irresistible to a contrarian investor. Still, to transform a contrarian idea into a worthwhile investment case, a credible scenario must be outlined that will dissipate the prevailing gloom.
Not everyone is as gloomy as the mass media – witness the following “straws-in-the-wind” gleaned in the last couple of days -- usually in less-visited sections of the newspapers we monitor.
Straws in the
Wind
Our intuitive view of Japan is that, after years of crisis, the country is in the midst of a transformation not unlike that of the United States in the early 1980s. At the time, Japan could do nothing wrong, whereas the US economy was in the midst of a “malaise” that had led many (including the American Manufacturing Association) to proclaim the death of American manufacturing. We, in contrast, detected the seeds of a momentous change, which we chronicled as America’s New Industrial Revolution. Japan is not America, and change there happens more slowly, more subtly and more hesitantly. Yet, change is happening and, in the next few weeks, we will begin to display the straws in the wind that may add up to a much more optimistic scenario for Japan’s economy and stock market.
Briefly, we believe that it is unrealistic to expect a prompt return of the Nikkei Index to the 40,000-level of the late 1980s, where it never deserved to sell in the first place. But Japanese industry is also in much better shape today than in late 1998, for example, when the Nikkei last sold at the current level of 13,000-14,000.
On the economic front, the country’s potential for economic growth will remain low even under ideal conditions. Still, current statistics have been made obsolete by the profound transformations that have already begun and they probably understate both the current level and the recent growth of Japan’s economic activity. In addition, corporate profits already have recovered strongly, and the potential exists for much higher levels of profitability. The rate of return on Japanese corporate assets remains pitifully low but stands to improve materially as a result of restructuring measures being implemented – especially in the manufacturing sector. As a result, in spite of the apparently still-high ratios of stock prices to earnings and cash flows, some historic values can be uncovered in the Japanese market.
François Sicart
©Tocqueville Asset Management LP. All rights reserved.
February 1, 2001
The information contained herein has been obtained from sources believed reliable, but is not necessarily complete and cannot be guaranteed. Tocqueville Asset Management L.P., their affiliates and their officers, directors, employees, advisors or members of their families as well as the clients for whom they manage portfolios; 1) May have positions in securities or options of issuers mentioned herein and may make purchases or sales of the securities or options while this publication is in circulation; 2) May hold directorships in corporations discussed in this publication. Affiliates of Tocqueville Asset Management L.P. may, in the last three years, have been manager or co-manager in a public offering of securities of issuers discussed in this publication.
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