Financial Times (London), September 8, 1990, Saturday
The Japanese wonder-ride bumps back to earth
IT IS the slow-motion crash which almost everybody outside Japan saw
coming. This week the Japanese stock market was testing its low point,
nearly 40 per cent below the crazy peak reached at the end of last December
when the Nikkei average topped out at 38,900.
Even after such a serious set-back there are still plenty of bears around.
It may seem bad enough that the Nikkei is languishing around the 24,000
mark, but you can easily find pundits willing to project the Tokyo market
down to 21,000 or even 15,000. [It is now at 19,000].
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The Japanese stock market miracle could not continue into the '90s,
although it was a wonderful ride while it lasted. The returns over the past
decade were fabulous. If you had put Pounds 1,000 into a typical Japanese
specialist unit trust at the beginning of 1980, that would have been worth
Pounds 11,770 last January 1. At that point, of course, you should have
sold. By now you would be lucky if your holding were worth more than Pounds
8,000.
The bursting of the bubble has scarcely been surprising. At the peak,
typical dividend yields were under 0.5 per cent, and price-earnings ratios
were 60 or 70. There were long and inconclusive arguments about the extent
to which Japanese companies have had hidden earnings which should be added
back to make their p/e ratios comparable with those in the US or Europe.
But, on the superficial numbers, many Japanese stocks last year were being
valued at three or four times as much as they would be in the US.
Such was the measure of the possible downside risk. With this in mind,
foreigners have been selling Japanese stocks in the past few years, though
many of them got out too soon. After all, the Tokyo market brushed aside
the Wall Street crash of October 1987 with amazing aplomb.
What finally pricked the Japanese asset price bubble was the tightening of
monetary policy. During the '80s Japanese interest rates fell steadily;
bond yields dropped from near 10 per cent in 1980 to about 4 per cent in
1988; while the official short-term discount rate was reduced from from
almost 7 per cent to 2.4 per cent over the same time-span. Money was so
cheap that the prices of assets such as shares and property (not to mention
Van Gogh paintings) became detached from reality.
But last year the Bank of Japan, worried by the dizzy property price spiral
and the weakness of the yen, began to change tack. Its short-term discount
rate has now been lifted in five stages to 6 per cent, and long bonds yield
8 per cent. These dramatic moves have forced the equity market to attempt
to reconnect with the real world. But at what level will it touch bottom?
Some Tokyo watchers derive comfort from the fact that a few big Japanese
industrial stocks such as Matsushita now have ratings which are reasonably
in line with international levels. Value investors, the ones who look at
individual company fundamentals, are starting to take an interest in Tokyo
after years of steering well clear.
But the average p/e is probably still well over 30. Some sectors,
particularly financials, remain at silly prices to western eyes. The
realignment of the Japanese equity market could take some time to be
completed, and amateur investors should keep on the sidelines.
Louis Proyect
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