The impression that Japan has been a lost-cause for global investors should be in store for a rethink based on stronger than expected economic data out recently.
The case for investing in under-achieving Japanese stocks can perhaps finally be made based on rebounding growth – at long last – but also based on the fact that Japan Inc. looks pretty cheap compared to its high-profile Asian neighbors.
Japan’s economy expanded at its most torrid pace in three-years, according to 4th Quarter GDP figures out last week.
Growth in the world’s second-largest economy checked in at 1.2% in the last period of 2006 – and a very fast paced 4.8% annual rate – positively stunning considering its recent past.
What makes the headline numbers sound all the more convincing is a closer look at the details.
Domestic personal consumption surged at 4.4% annual rate supported by rising wages. For Japan, which has long been forced to rely on exports to post ANY economic growth at all due to a long slumber in consumer spending, this news looks especially positive for a sustained recovery.
The Ginza Goldilocks Scenario
That’s no doubt what the ministers at the Bank of Japan (BOJ) had in mind today also, when they hiked the official policy rate (akin to the US Fed Funds rate) to a still low 0.5%. After taking this step to boost lending rates, delayed at the BOJs last meeting in January, many economists see monetary policy on hold for the remainder of the year.
Such expectations of policy stability tend to give both stock and bond markets a floor to rebound off – and Japanese stocks in particular look poised to do well in this faster growth, low inflation, stable interest rate environment – let’s call it the Ginza Goldilocks scenario.
That Japan is relatively undervalued compared to its Asian neighbors is an understatement. Last year, while Chinese mainland stocks rose to triple-digit gains and many other Asian bourses posted rich returns – Japan was the only major market in the region to under perform, rising barely 6% in 2006.
But rampant price appreciation has turned many Asia ex-Japan markets, well pricey. And a closer look at Japan Inc. reveals a healthy market that may finally see big gains ahead.
Japan Inc. is Flush With Cash
First, Japanese corporate profits are soaring, up at an annual rate of 15.5% in the third-quarter of 2006. Companies have been paying down debt, and balance sheets in the land of the rising sun are flush with cash. In fact, debt-equity ratios in the Nikkei 225 Index are now the lowest in fifty years.
Cannon, the Japanese optics and electronics giant is sitting on net cash of 1,131 billion yen (US$9.5 bil). Industrial conglomerate Matsushita has Y1,131 billion stashed in it’s vaults, while high-tech game maker Nintendo shows a balance sheet with ZERO debt, and cash of Y876 billion on hand.
All this net-cash sitting on balance sheets means these companies are obvious targets for “value enhancement strategies” – whether performed by management itself – or at the hands of a corporate raider through stepped up merger & acquisition activity.
Increased Payouts and Buyouts
One way that Japanese corporate management can unlock this hidden value in their stocks is by returning cash to shareholders, either through dividends or share buybacks. And companies are doing just that.
Big multi-nationals in Japan including Toyota, Honda, and Canon have boosted their dividend payout ratios to about 30%. Sumitomo Mitsui Financial with a 20% dividend payout target now in place, may increase it to 40%.
Another tactic growing popular in corporate boardrooms is management led buy-outs of Japanese public companies. Recognizing how cheap many of these companies are, the number of management buy outs in Japan jumped 19% to a record of 80 deals last year, worth Y687.6 billion.
Of course all of these activities should provide continued support for share prices in Japan, which explains why the land of the rising sun should see rising stock markets ahead.
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