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No, it wasn’t Wednesday’s earthquake, even though it prompted the normally staid fixed income commentators at RBS Securities Japan to end their daily Japanese government bond market note thus:
Northern Japan was hit by a 7.3-magnitude earthquake at lunch time. We were likely on a ship as the building where our office is located in central Tokyo (around 300-kilometer away from the earthquake center) shook more than 5 minutes!
It’s about stranger things than that. Further to our post last week on “Japan’s big comeback…?”, more evidence comes this week of new attention — and growing investment inflows — into this battered, bashed and sometimes “universally hated” (Charles de Vaulx’s words, according to the NYT) market.
CLSA strategist Christopher Wood — who has on occasion been a harsh Japan critic — has adjusted his recommended portfolio to change dollar risk for yen risk.
In a ‘flash’ note to clients he says he has initiated a 10 per cent weighting in Tokyo physical real estate, both commercial and residential, and a 5 per cent weighting in his long-only Japanese equity portfolio — to be paid for, he adds, by removing the weighting in the 30-year US Treasury bond.
The main reason for the change, says Wood, is that on a five-year view, he now believes a “fiscal crisis is more likely to happen in America before Japan”.
But why Japanese real estate and equities over bafflingly popular JGBs? They are, in Wood’s view, a superior hedge against a “still possible future fiscal crisis in Japan”. He notes:
Physical property is preferred to equities in Japan from a pension fund's standpoint because it has a far superior yield and is less higher beta, having rallied far less than the Topix from the post-Lehman lows.
What’s more, believes Wood, the Japanese equity market can outperform even if the yen stays strong. Meanwhile, the Topix dividend yield remains well above the 10-year JGB yield — i.e, the Topix dividend yield at its present 1.7 per cent compares with the current 10-year JGB yield of 1.3 per cent.
However, he stresses, the property allocation is to Tokyo physical property not Japanese property — a “far better proposition”, he says, “because of continuing net migration into the capital whereas the rest of Japan, aside from the ludicrously hyped bubble in Hokkaido's Niseko ski resort, is suffering the full brunt of the demographic fallout, however superficially tempting the double digit yields available outside Tokyo”.
More backhanded praise for Japan came from Mizuho’s Jonathan Allum, who noted after news of the abrupt resignation of Japan’s foreign minister Seiji Maehara on Sunday how mercifully little Japanese political scandals seem to affect the country’s markets and investor confidence. He notes:
By historical standards, Mr. Maehara's transgression "“ accepting political donations of ¥200,000 over four years form a Korean woman, long resident in Kyoto "“ seems relatively minor but in the febrile condition of contemporary Japanese politics this has been enough to damn him to oblivion. His boss Mr. Kan may, it is widely predicted, follow. Even before this latest banana skin the Cabinet's popularity had dropped to dangerous levels, as shown below:
Should investors be concerned?, he asks, before concluding via a nifty calculation that plots the popularity ratings of Japanese Cabinets against the Topix index that there is now no correlation.
If the big dips in the popularity of the two ‘reformist’ prime ministers from the ruling DPJ party have been ignored by the equity market, one can make a similar point about the economy, “which has actually done rather well under DPJ stewardship, although in peculiarly Japanese fashion they appear reluctant to claim any credit”, adds Allum.
Not to put too fine a point on the growing allure of Japan for some investors, Edward Chancellor, an asset allocation manager at Jeremy Grantham’s GMO (which is also showing more interest in Japan stocks within its Asian portfolio) and writes occasionally for FTfm, damned Japan with faint praise in a recent column, declaring:
There is no doubt Japan faces severe challenges. Yet it is hard to avoid the conclusion that today's apocalyptic commentary is overblown. Therein lies the investment opportunity.
Related links: Does Japan really win from commodity inflation? - FT Alphaville John Plender: A compelling case for investing in Japan - FT Special report: Investing in Japan "“ FT Peter Tasker: Stop looking in the rear-view mirror on Japan "“ FT
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