However, on the flip side, it is a boost to many Japanese companies exporting products with a high IP (intellectual property) content priced in US dollars.
Predicting currency movements is too hard frankly, so we try to create a natural and cost-effective hedge by including some of Japan’s major exporters, such as Mitsubishi Heavy Industries and Komatsu, which have profited from the relative strength of other currencies for several years.
We counterbalance exporters with holdings in several cheap mid-cap domestic yen earners that are embarking on a programme of self-help to improve profitability. Companies in this category, such as Nippon Television and Sompo Holdings, could offer decent defensive returns, especially if the global markets get hit by a cold.
Firms with cross-shareholdings are also worth investigating. Pressure to ditch this controversial practice – called keiretsu – which involves companies holding shares in their business partners, has been mounting for years. By improving balance-sheet efficiency and capital structure, the unwinding now taking place can be a strong source of value creation.
There are also businesses that might be described as less Japanese than they look. Take Mitsubishi UFJ, Japan’s largest bank, which is staunchly committed to modernisation and also happens to own nearly a quarter of Morgan Stanley. Buying a bit of Tokyo and getting a chunk of Manhattan into the bargain could be seen as quite a coup.
Genuine opportunity or another false dawn?
Many Japanese stocks trade at price-to-earnings (P/E) ratios of between 8x and 15x. As with the similarly unfashionable UK market, this presents the opportunity to purchase high-quality, underappreciated companies cheaply. At these undemanding valuations you get a lot of upside potential and – at a time when US stocks are looking expensive – a lot less downside risk.
There are plenty of potential catalysts for a strong surge in the Japanese market, but while you are waiting you can enjoy the dividends. In our fund, the Japanese holdings trade on average P/Es of 13x and yield 3%2.
Yes, a 3% yield may seem relatively low, but remember, this is still about the only economy where equities yield notably more than government bonds. And Japanese dividends are rising faster than those of the S&P 500 – a shade under 10% a year over the past decade.
Naturally, there remains a possibility that this new dawn for the Land of the Rising Sun turns out to be a false one. But at worst, Japanese stocks should be able to bring defensive qualities and steady growth to a globally diversified portfolio; at best, they could provide opportunities for income and significant growth over the longer term.
