Japan Beckons Global Investors

Investors worried about valuations and an impending correction on Wall Street might want to take a look at Japan. For a country that has been constantly in and out of recession since the early 1990s, Japan’s macroeconomic fundamentals haven’t looked this good in years.

GDP grew at an annualized rate of 4% in the June quarter and is likely to top 1.6% for the calendar year and 1.5% next year, up from 1% last year. Japan remains the only major developed economy where monetary policy is likely to remain easy over the next couple of years, Barrons reported.

Japanese stocks are cheap. Tokyo’s market trades at just 14 times 12-month forward earnings, or at 1.3 times book with a 2.2% dividend yield. The Standard & Poor’s 500 trades at 18 times forward earnings and European stocks at 15.5 times.

Hisao Matsuura, chief strategist for Nomura in Tokyo, estimates that corporate earnings will grow nearly 18% in the fiscal year ending next March and another 8% in the following fiscal year. While earnings growth in Europe is on par with Japan, US corporate earnings are growing only half as fast.

So, what’s been holding back the market? North Korean leader Kim Jong-un’s missiles for one. Japanese domestic politics has been another drag though Prime Minister Shinzo Abe reshuffled his cabinet in early August to address some of the issues and is expected to extend Bank of Japan’s Governor Haruhiko Kuroda’s term when it expires early next year.

Another concern: the recent strength of the Japanese currency. Nomura estimates the break-even rate for exporters is around 102 or 103 yen to the dollar. “I am not worried as long as the yen remains above the 100 mark,” he says.