Japan Is the Most Exciting Market in the World - Kanebridge News
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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

Thu, Oct 5, 2023 9:58amGrey Clock 3 min

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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These stocks are getting hit for a reason. Instead, focus on stocks that show ‘relative strength.’ Here’s how.

Wed, Jun 12, 2024 4 min

A lot of investors get stock-picking wrong before they even get started: Instead of targeting the top-performing stocks in the market, they focus on the laggards—widely known companies that look as if they are on sale after a period of stock-price weakness.

But these weak performers usually are going down for good reasons, such as for deteriorating sales and earnings, market-share losses or mutual-fund managers who are unwinding positions.

Decades of Investor’s Business Daily research shows these aren’t the stocks that tend to become stock-market leaders. The stocks that reward investors with handsome gains for months or years are more often  already  the strongest price performers, usually because of outstanding earnings and sales growth and increasing fund ownership.

Of course, many investors already chase performance and pour money into winning stocks. So how can a discerning investor find the winning stocks that have more room to run?

Enter “relative strength”—the notion that strength begets more strength. Relative strength measures stocks’ recent performance relative to the overall market. Investing in stocks with high relative strength means going with the winners, rather than picking stocks in hopes of a rebound. Why bet on a last-place team when you can wager on the leader?

One of the easiest ways to identify the strongest price performers is with IBD’s Relative Strength Rating. Ranked on a scale of 1-99, a stock with an RS rating of 99 has outperformed 99% of all stocks based on 12-month price performance.

How to use the metric

To capitalise on relative strength, an investor’s search should be focused on stocks with RS ratings of at least 80.

But beware: While the goal is to buy stocks that are performing better than the overall market, stocks with the highest RS ratings aren’t  always  the best to buy. No doubt, some stocks extend rallies for years. But others will be too far into their price run-up and ready to start a longer-term price decline.

Thus, there is a limit to chasing performance. To avoid this pitfall, investors should focus on stocks that have strong relative strength but have seen a moderate price decline and are just coming out of weeks or months of trading within a limited range. This range will vary by stock, but IBD research shows that most good trading patterns can show declines of up to one-third.

Here, a relative strength line on a chart may be helpful for confirming an RS rating’s buy signal. Offered on some stock-charting tools, including IBD’s, the line is a way to visualise relative strength by comparing a stock’s price performance relative to the movement of the S&P 500 or other benchmark.

When the line is sloping upward, it means the stock is outperforming the benchmark. When it is sloping downward, the stock is lagging behind the benchmark. One reason the RS line is helpful is that the line can rise even when a stock price is falling, meaning its value is falling at a slower pace than the benchmark.

A case study

The value of relative strength could be seen in Google parent Alphabet in January 2020, when its RS rating was 89 before it started a 10-month run when the stock rose 64%. Meta Platforms ’ RS rating was 96 before the Facebook parent hit new highs in March 2023 and ran up 65% in four months. Abercrombie & Fitch , one of 2023’s best-performing stocks, had a 94 rating before it soared 342% in nine months starting in June 2023.

Those stocks weren’t flukes. In a study of the biggest stock-market winners from the early 1950s through 2008, the average RS rating of the best performers before they began their major price runs was 87.

To see relative strength in action, consider Nvidia . The chip stock was an established leader, having shot up 365% from its October 2022 low to its high of $504.48 in late August 2023.

But then it spent the next four months rangebound—giving up some ground, then gaining some back. Through this period, shares held between $392.30 and the August peak, declining no more than 22% from top to bottom.

On Jan. 8, Nvidia broke out of its trading range to new highs. The previous session, Nvidia’s RS rating was 97. And that week, the stock’s relative strength line hit new highs. The catalyst: Investors cheered the company’s update on its latest advancements in artificial intelligence.

Nvidia then rose 16% on Feb. 22 after the company said earnings for the January-ended quarter soared 486% year over year to $5.16 a share. Revenue more than tripled to $22.1 billion. It also significantly raised its earnings and revenue guidance for the quarter that was to end in April. In all, Nvidia climbed 89% from Jan. 5 to its March 7 close.

And the stock has continued to run up, surging past $1,000 a share in late May after the company exceeded that guidance for the April-ended quarter and delivered record revenue of $26 billion and record net profit of $14.88 billion.

Ken Shreve  is a senior markets writer at Investor’s Business Daily. Follow him on X  @IBD_KShreve  for more stock-market analysis and insights, or contact him at  ken.shreve@investors.com .