Japan: Chasing Yield in a Low Interest Rate World

Global interest rates are again falling on growing concern about the slowdown in the US economy. Just as speculation about a possible reversal in the yen carry trade reached a fever pitch, the carry trade was becoming increasingly popular once again, weakening the yen significantly to a break-out above the JPY118.50 level. The recent economic news in Japan hasn’t necessarily been working for Japan’s currency either.

With the massive global excess savings glut continuing to expand, substantial amounts of money will continue to slosh around in global financial markets until central banks seriously begin to tighten credit, and/or the US and other economies fall into serious recession.

Given increasingly volatile stock markets amid growing concern about the sustainability of an already long-in-the tooth economic expansion, a regular stream of dividend payments is the closest thing investors have to a guaranteed return.

Contrary to popular "wisdom” about growth stocks, studies have shown time and again that dividend payers handily outperformed non-payers over time. At the same time, those same dividend-paying stocks experience far less volatility, and can be counted on to deliver stronger relative returns in difficult market environments.

Thus it is no surprise that the classic “Dogs of the Dow” continues to outperform in the US. In addition, a similar approach in Japan, i.e., the “Dogs of the Nikkei” has returned a cumulative 133.6% from 2003 to 2006, compared to a cumulative return (capital gain only) of 82.7% for the Nikkei. The “Dogs” approach continues to outperform in 2007.

The other major yield play in Japan is REITs. A TJI basket of the originally listed REITs has returned a strong capital gain of 26% year to date and a 74% capital gain since November 2004. Given that low interest rates are expected to continue for the foreseeable future in Japan, and that rental growth is very strong on rising property prices, we believe there is significantly more outperformance ahead for Japanese REITs.

Comments

[Marty From ...:]

Hey Darrel, I'm glad you've chosen to write about Japan. I see it as a contrarian play given the currency at very low levels and the stock market has only moved a little. I need dividends and I want to own Japanese real estate. I am accessing the TSE, but I am having trouble finding the info I want. Could you do a special article on Japanese REITs and their various strengths, etc.? thanks, Marty

2007 Apr 24 01:47 AM

[Darrel Whitten:]

Dear Marty;

Your suggestion is a good one given that that our portfolio of "core" REIT stocks (i.e., those that were first listed) is showing the best YTD 2007 performance of any other Japanese equity group year-to-date (up 26%) and (up 73%) since the model portfolio was launched in November 2004.

The REITs first listed (some 14) are stronger because they were the earlier movers, i.e., they acquired commercial properties in central Tokyo locations (Tokyo's 23 wards) for very attractive prices, well before the "hot" money began arriving.

However, since Japan Investor is a subscription site, I'm afraid information on specific REITs is only available to subscribers.

Regards,
Darrel

2007 Apr 25 11:20 AM