Opportunities still seen in Japan

Analyst who bucked the crowd to predict Nikkei’s recovery offers market insights


Markets, Net Worth, The Globe and Mail, October 23, 1999


One year ago, we gave a chunk of space to Montrealer Sid Klein to make his case that the Japanese market had bottomed at a time when few others shared his optimism.  Mr. Klein, who predicted the cataclysmic meltdown of the early 1990s in Japan, had a fine year.

The Nikkei 225, languishing at about 13,000 when we published the piece, has soared to 17,438.  Has the window of opportunity closed?  Nope.  Although Mr. Klein believes there’s a chance the market may weaken in the final quarter, longer term he sees a wonderful bull market unfolding in Japan.  We asked Mr. Klein to update us on what’s happened over the past year, where he sees things going and to offer some investment ideas.


Sid Klein

Special to The Globe and Mail, Montreal


Japan’s benchmark index, the Nikkei 225, bottomed a year ago and has rallied 45 per cent since.  During that time, the country’s over-the-counter market, a better barometer of the domestic economy, has risen 350 per cent.

For foreign investors, these startling gains have been compounded by the soaring yen.  From last year’s darkness, Japan’s year-long rebound has ushered in a change in the global equity landscape.  That change will preserve Western bull markets in the faint and happy memories of those who charted their own course to the blue chip of the East, Japan.


Where’s what’s changing in Japan and what it means to investors.


Land and taxation:  The Japanese deflated land prices in the 1990s by increasing key tax rates.  The government has changed tack and a variety of taxes are now set to drop in the wake of lower corporate rates.  This will buoy asset prices and consumer spending.  The securitization of real estate will liberate enormous capital into the markets.


Housing and demography:  Expanded and extended tax breaks sent housing stocks soaring, and the government has confirmed it wants to double the housing space over the next five years.  Increased housing stock, apart from helping the economy, is designed to encourage Japanese families to have more children.  Housing and related industries are at the core of Japan’s re-emergence as the world’s leading economy.

Bank reform, liquidity, merger and acquisition activity:  The view in these pages a year ago was that stock prices would rise as investors discovered that they were discounting lower asset prices – prices that were themselves bottoming.  In fact, this phenomenon has led to gains in the value of stocks that Japanese companies carry on their balance sheets, bolstering earnings and improving the condition of pension under funding.

Further increasing asset prices have been merger and acquisition activity, which has roughly tripled and has far to go before coming in line with U.S. norms.  Stock prices can look forward to about $400-billion (U.S) being shifted to mutual funds in April 2000, and July 2001, from the postal insurance fund.

Over the past year the government, through loan programs and eventual bank capital injections, has helped to reduce the number of insolvencies and the size of bad debts left behind by companies.


Psychology and the yen:  With the full deregulation of brokerage commissions, financial stocks have become extremely vibrant, in many cases offering double or even triple-digit returns over the past 12 months.  Meanwhile, the rise in stock prices has increased household wealth.  The shares that rallied most – domestic demand stocks – are those held by the Japanese public.  This will ultimately increase consumer confidence.

As discussed a year ago, this is the opposite situation to New York, where falling stock prices hurt the consumer.  Remember, too, that the Japanese hold 40 per cent of the world’s savings.

The yen has risen over the past years as foreigners return to the Japanese market.  While the yen may weaken in the fourth quarter as foreigners ease back on stock purchases, the bigger story is the yen’s unfolding role as the Asian bloc’s currency.  Meanwhile, the yen’s strength has made other Asian goods more competitive in Japan, which has shown that it is increasingly sensitive to the need for a healthy Asian economy.


The bottom line:  Debt-free companies in key industrie