Learning From Japan

Has there been a more demoralizing and disappointing major stock market, over the course of the past 20 years, than Japan’s? It reached its nominal all-time high of 38,957 in December 1989; it closed today at 8,693, just 800 points or so north of its 2003 low.

The plight of Japanese shareholders is germane to anybody thinking of buying stocks today. Japan’s companies are well-run, and its financial institutions, as we saw with the MUFG deal, are today more part of the solution than they are part of the problem. And yet, as Tim Price notes,

the entire Japanese stock market is left trading close to book value at levels, in real terms, equating to where it traded in the early 1970s.

Japan, of course, knows what it’s like to go through a credit crisis and a vicious deleveraging — and it’s had two decades to reconfigure itself into a viable post-crisis economy. Which is not to say that Japanese stocks are a screaming buy right now, but which is to say that if you think that stocks in the US are cheap, maybe you could look across the Pacific and find some equally-attractive assets which are even cheaper. Or, to put it another way, the lesson of Japan is that even cheap stocks can continue to decline for decades.

The US will never again drive the global economy in the way it has done for the past 60 years, and the presence of multinationals on the Dow does not make it a proxy for world stock-market performance. Japan still accounts for a large chunk of global economic activity; it might makes sense, if you’re not invested there already, to rotate some small part of your funds into a country which learned many painful lessons over the course of the 1990s. Assuming, that is, that you still have any faith at all in equities as an asset class.

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