Japan: Decline of a Safe Haven

Since September, Japan has been seen as one of the few bastions of relative stability in the global economic climate. Its stock market “only” fell approximately 30% during the September crash, compared to the approx. 40-60% declines in the US and China markets respectively.

Japan has weathered the global economic storm much better than most. This is evidenced by the following Emerginvest performance charts of Japan, China, and the US – note the relatively shallow decline in September for Japan compared to its counterparts (click on charts to enlarge):

Japan’s Market Performance over the last year.

China’s 12-Month Market Performance

And the US’s 12-Month Market Performance.

To date, the extremely high savings rate in Japan has helped bring a measure of relative stability to Japanese markets. This has prompted articles such as this one in the Washington Post from November, 2008 entitled: “Individual Japanese Investors Rush Into Stocks.” The article stated that because of the high savings rate, retail investors were “armed with $7 trillion in bank deposits.” Some of the lowest stock market valuations of the last 20 years then induced a rush into the stock market from retail investors.

The high savings rate, the comparative stability of the Tokyo Stock Exchange to date, and the relative solvency of the Japanese banking system, has granted Japan an investor’s “safe-haven” status since September – especially when compared to the volatility of most other markets around the world.

However, that image has come crashing down as the Japanese government announced that the fourth quarter of 2008 saw the fastest contraction for the economy (in terms of GDP) in 35 years. A NYTimes article entitled: “Japan’s Economy Plunges at Fastest Pace Since ’74,” describes how the Japanese economy, which is heavily reliant on exports, is suffering heavily now that the effects of plummeting global demand is taking hold:

“There’s no question that this is the worst recession in the postwar period,’ Japan’s economic minister, Kaoru Yosano, said in the article in response to the results.

The dismal figures also place Japan firmly among the worst-hit in the global crisis, dwarfing economic declines in the United States and Europe.

Suffering from a strong yen which makes Japanese exports more costly, and from lagging global demand across nearly the entire spectrum of goods (electronics in particular), Japan has been thrown into the financial maelstrom with full force.

Unfortunately, this contraction is just the first of a series of effects, with unemployment to follow shortly hereafter. So far, Japan’s unemployment has remained relatively low: rising to 4.4% in December.

This is still quite mild compared to Germany’s current unemployment of 7.8% or to the U.S.’s unemployment of 7.6%. Given that the economy contracted so significantly in such a short amount of time, companies are inexorably going to be cutting jobs. They'll be cutting large quantities and quickly, just as Sony Corporation (SNE) recently has. Of course, this will be reflected back into the stock market.

In no way does this mean that Japan is down and out for the count – it has simply taken longer to fall from grace than most other world markets, and subsequently is losing its special “safe-haven” status for many investors.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Jonathan O’Shaughnessy, does not have any holdings in Japan or in Sony Corporation.

Comments

[japan20000:]

where on earth did your hear of the japanese stock market to be a safe heaven? And how did it crash less if it is 60% from its peak in July 2007? It is still 80% down from its peak of about 40k in 1989. What have you been smoking? It is understandably a more volatile exchange because it is hugely leveraged to the outside. Tokyo has traditionally traded with higher multiples.
The currency market is a totally different thing because of a number of issues that other markets do not have. There you could attach the safe heaven label to the yen... in certain periods.

Feb 18 06:37 AM

[Emerginvest:]

Japan20000:

In response to your questions:

"where on earth did your hear of the japanese stock market to be a safe heaven?"

One of a few sources:

NYTimes article: www.nytimes.com/2009/0...

"'At one time, it looked like Japan escaped the brunt of the financial crisis. Now we see Japan’s most damaged because it’s so dependent on trade, which is stalling,' said Hideo Kumano, chief economist for the Dai-Ichi Life Research Institute. "

"Tatsuo Ichikawa, a Tokyo-based strategist at the Royal Bank of Scotland [said]: 'Japan, a source of stability and liquidity at the onset of the crisis, is falling very fast. '"

Your second question:

"And how did it crash less if it is 60% from its peak in July 2007? It is still 80% down from its peak of about 40k in 1989."

I stated: "Its stock market “only” fell approximately 30% during the September crash"

Please focus on the key-phrase "during the September crash" - as in not from its high peak in July, but during the volatile month of September. According to Emerginvest, the TSE was at approximately 122,055 Yen at the beginning of September, and ended up at approximately 84086 Yen at the end. That represents a fall of 31.1% - or, like I said... approximately 30%.

Your Third Statement:

"What have you been smoking?"

I think it is much more highly professional, and a better reflection of yourself to ask for clarification in a non-attacking/insultin... manner. If you still disagree with the answer, then so be it, but it is typically polite to ask before unabashedly personally attacking the person you are trying to communicate with.


On Feb 18 06:37 AM japan20000 wrote:

> where on earth did your hear of the japanese stock market to be a
> safe heaven? And how did it crash less if it is 60% from its peak
> in July 2007? It is still 80% down from its peak of about 40k in
> 1989. What have you been smoking? It is understandably a more volatile
> exchange because it is hugely leveraged to the outside. Tokyo has
> traditionally traded with higher multiples.
> The currency market is a totally different thing because of a number
> of issues that other markets do not have. There you could attach
> the safe heaven label to the yen... in certain periods.
> Why even bother writing stuff that doesn't tell anything at best
> or simply misleads.

Feb 18 11:28 AM

[HaavBline:]

I have known no one who considered Japanese stock market as a 'safe haven' in the last 15 years. As the 2nd largest economy and one of the richest country in the world, their highly export-driven growth model should have expired 20 years ago. It is a crime against poorer countries in Asia that they never seriously attempt to reform their economy into a consumer-driven economy, instead, doing everything to keep foreign goods, services and people out of Japan.

Even the Yen's safe haven status could be numbered, as the unwinding of the Yen Carry Trade, which was a huge factor that pummeled all foreign asset classes last year, may be coming to a close.

Feb 18 11:32 AM

[Mad Hedge F...:]

Every night the evening news in Japan refers to the “Great American Depression”. Do they know something we don’t? I hear largely inaccurate comparisons to our current economic debacle to Japan’s lost decade on an almost daily basis. But there is one thing both have in common. Nobody believes for a second the securities the banks own are worth what they say they are worth. That’s what bank hoarding of capital is telling you. The question here remains, how quickly can the banks be forced to face the music?

Feb 18 11:57 AM

[BigOlDave:]

Neither the yen nor the dollar will hold up under a further surge in gold prices. If you think you're too late in adding GLD, look at YCS as an easy way to short the yen.

Feb 18 01:43 PM