Japan Is the Most Exciting Market in the World
Warren Buffett’s visit in the spring highlighted the value, and stocks are up 20% since March
Warren Buffett’s visit in the spring highlighted the value, and stocks are up 20% since March
There are conflicting stories to tell about investing in Japan at the moment, and annoyingly both appear to be correct.
The first is that the stock market is on fire, producing the best returns of any major developed country since the start of last year as foreigners wake up to the new shareholder-friendly approach of government, stock exchange and corporate boards.
Billionaire Warren Buffett’s visit and positive comments in the spring highlighted the value of venturing to the country, and stocks are up more than 20% since late March as foreign cash poured in.
The second is that all the work has been done by the collapsing yen, and in dollar terms Japanese stocks have performed almost exactly like the S&P 500.
I’m convinced by both stories, which is tricky. Under the first, I’ve long thought that Japan is shifting more toward market capitalism (even as the U.S. appears to be moving away from it).
The reform process that began with the third of the “three arrows” of Abenomics a decade ago is finally bearing fruit, as directors increasingly focus on profitability, run down cash piles and put investors first. There is still a long way to go (the barbarians remain mostly outside the gate) but buybacks, hostile takeovers and pushy investors getting their way are no longer impossible.
It isn’t just that the government, takeover panel and stock exchange are trying to create a friendly environment for shareholders. As Peter Tasker, co-founder and chief strategist of Arcus Investment, points out, they are pushing at an open door.
Companies overall have net cash, freeing them from the obligations to banks that made them focus on their lenders rather than their shareholders.
Incipient inflation—still supported by negative interest rates at the Bank of Japan—makes holding cash less attractive. The aging population has created a permanent labor shortage. This makes layoffs politically easier since jettisoned workers can find new work quickly. And the desire of the U.S. and Europe to reduce dependence on China makes Japan’s manufacturing base and Pacific location attractive.
“I see a confluence of the incentives for investors put in place by the authorities and the position of Japan geopolitically as being very important, particularly as the yen is so cheap,” Tasker says.
The very cheapness of the yen is the problem, though. Since the start of last year, gains for Japanese stocks over and above the S&P have come only when the yen weakens—which it has done in high style. The currency is approaching 150 yen to the dollar again, worrying policy makers who intervened last year for the first time since 2011 to protect the level. This week, Finance Minister Shunichi Suzuki warned of possible intervention although insisted that it is sharp moves in the yen, not the currency’s level, that the government cares about.
It is natural that Japanese stocks should gain as the currency weakens, since the biggest are global companies such as Toyota Motor and Sony Group that earn much of their revenue overseas. The problem is that when the yen’s moves are stripped out, the Japanese market has matched the U.S. almost perfectly.
This makes it doubly hard to be bullish on Japan in the short run. If the currency strengthens, stocks should fall. And the currency is likely to strengthen if and when the central bank pulls back from super-easy policies in the face of rising inflation (core consumer prices are rising at the highest rate since 1992, before deflation set in).
Worse, it’s really hard to see why Japanese stocks have performed like the S&P, given the huge differences between the two markets. Investors shouldn’t invest in things they don’t understand, and the tight link between the performance of the broadly diversified Japanese market and the tech-dominated, top-heavy S&P is a puzzle.
Maybe it is driven by index and futures traders throwing billions around while ignoring individual stocks, thus creating great opportunities for stock pickers. But this is impossible to prove, and the alternative theory is blind luck, not a great basis for an investment.
One twist to my concerns is that perhaps it’s good that Japan has only matched the U.S. for the past couple of years, because it means many investors haven’t yet bought into the idea that Japan is fixing its stock market. For those of us who think there is a long-lasting change under way in Japan, that means there is still plenty of buyers out there who will eventually join in.
That shows up in stock valuations. Tasker calculates that almost half the benchmark Topix index trades at less than book value, while the index has a forward price/earnings ratio of 14 times, against 18 for the S&P.
True, it’s no longer the screaming bargain it was at below 11 times before Abenomics began, or around 12 earlier this year when Buffett visited Tokyo and said he might increase already-hefty holdings in the country’s trading houses (which have all outperformed the broader market since). But it is at least much cheaper than the U.S.
Japan has plenty of long-run economic challenges, not least a huge government debt load and among the world’s worst demographics, as well as a reliance on central-bank financing. The puzzling link between its stock market and the S&P gives me pause for thought, too.
But for the medium to long run, so long as macroeconomic disaster is averted, the shift toward market capitalism ought to lead to better-run companies that are worth more.
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Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.