Japan's 'Lost Decade' Gives Way to the New Asian Reality

KYOTO, JAPAN - On one of my first mornings at our home here, my family and I headed for the Fushimi Inari Taisha shrine. Built in the 8th century by the powerful Hata family, the shrine is best known for the four consecutive kilometers of orange Torii gates covering the mountain on which it was built.

My wife’s family has been coming here for centuries, making it a familiar and comfortable place that we enjoy very much.

It’s also a spot that tends to put things into perspective - like the Bank of Japan’s recent decision to keep its key interest rate at 0.5%.

So why is this move by Japan’s central bank important? That’s easy.

We’ve been hearing for years how the Japanese economy is poised for a recovery. And each New Year is supposed to be "the" year - yet it just somehow never seems to happen - at least according to folks who don’t spend as much time here as I do.

Sure, Japan went to hell and back during the "Lost Decade" that stretched from 1990 - 2000, but this country’s economy is recovering - even if the securities markets don’t yet reflect this: They’re up only marginally so far this year.

But that speaks volumes about what investors should expect when thinking about Japan. For instance, the beautiful young elevator ladies who used to grace Japan’s top department stores have vanished. Yet, individual customer service remains better than ever.

Many of the so-called boutique shops have also faded into the sunset. But those shops have been replaced by multi-sale retailers and Internet shops, all of which are going great guns.

This suggests companies are becoming more cash sensitive even as they’re becoming more aggressive. So are Japanese consumers. It’s a trend that’s moving Japan along quietly, if steadily.

But what’s really interesting to me after having spent 20 years in and out of Japan is the number of students who now are studying Chinese, as well as English.

Like the Japanese companies and consumers that are driving the "stealth recovery" here, students who want to get ahead are doing all they can to learn more about their neighbor, including the language.

They understand that they have to look beyond the labels that say "Made in China," and consider the growing Chinese consumer class - especially China’s emerging middle class, which is already 325 million strong.

While some experts claim that the two nations, Japan and China, will never be friends because of World War II era animosity, those with a far longer perspective acknowledge that the two actually were very close - centuries ago. Much of Japan’s writing system, religious roots and even early architecture came directly from China’s royal courts more than 1000 years ago.

The two nations will be close again.

The best way investors can capitalize on this eventuality is not to buy the broader Japanese indices. Those will merely pick up the has-beens, wannabes and never-wases. It’s far better to concentrate on those companies that are already working closely with China.

The companies in this category firmly understand the regional dynamics at play today. But, more importantly, they understand just what the future is going to look like, and are already preparing for business dealings with China - and the Chinese consumer.

Some great choices if you want to cash in include solar-ceramics maker Kyocera Corp. (KYO), trading giant and independent power plant developer Mitsui & Co. Ltd. (MITSY), and even Toyota Motor Co. (TM), which is now the world’s No. 1 automaker, and (as Money Morning just reported) also has branched out into commercial jetliners.

Since I’m scheduled to head back down the mountain shortly, I’m going to close this out (yes, for those of you who are wondering, I really am writing on my laptop thousands of feet above Kyoto) so that I can check in on the summit between Chinese President Hu Jintao and Japanese Prime Minister Yauo Fukuda.

It’s the first visit by a Chinese head of state in a decade.

I’ll have more to say about that visit in the days to come. And I’ll be returning to the United States fairly soon, too. I’ll keep you posted.

Comments

[Lance]

... even if the securities markets don’t yet reflect this: They’re up only marginally so far this year.

What securities markets in Japan could you possibly be referring to, please? Neither the N225 nor the TOPIX are up at all. Both are down nearly 10 percent in fact. They are up from down about 20 percent in March, but then that is still not up this year.

[huangthomas]

Japanese market is a play ground for foreign investors. Japanese investors are still staying away after the major crush of Nikkei 225 from 40,000 to 7,500 (1989 - 2000). Even in 2007 surge, foreign capital accounted for 90% of the trading.

[dieuwer]

There always have been longer periods of mediocre investment returns. The period 1900 - 1920 comes to mind, when the DJI traded between 50 and 100 up-down-up-down seemingly for ages. Or remember the period from 1930 until 1950? Investors who had bought near the top at 350 were still reeling from the 350 to 50 crush (1929 - 1932) and never fully recovered until the late '50s.
I guess it will be a similar story with the Nikkei. The Japanese "Great Depression" and "hungry 40's" is almost over.

[kevin76013]

Poor demographics. The wealthy Japanese not having many kids. Tough to grow the economy on a declining user base.