A Brief Observation Of The Japanese Market

| About: iShares MSCI (EWJ)
This article is now exclusive for PRO subscribers.


We pay more for American earnings vs. Japanese earnings.

Is Japan really as bad as it seems?

Japanese companies seem to be doing okay.


Lately, I have had a growing interest in Japanese equities. One of the reasons for this is that there is a lot of coverage on many US names, which means increased "competition" in having an analytical or informational edge. Having grown up in Japan, I have been fortunate enough to have the opportunity to learn how to speak, read, and write fluently in Japanese. Naturally, I drifted into reading up about the Japanese markets. If that means I can gain an analytical or informational edge, then yay to me.

The aging/declining population, high government debt level, and economic recession/stagnation seem to be the common reasons investors have avoided Japan like the plague in recent decades. My intention for writing this article is not to say that Japan's aging/declining population, high government debt level, or economic recession/stagnation are not real problems. Instead, my approach is more like this: Every nation has their problems - Is Japan's set of problems really that bad?

The Digging

My digging for an explanation started when I took a peek at the S&P 500 Fact Sheet the other day (Confession: I don't check it very often). It turns out that the S&P 500's (NYSEARCA:SPY) P/E ratio is 24.15 (09/30/2016). In comparison, Japan's (EWJ, DXJ) TOPIX has a P/E ratio of 16.9 (09/30/2016 - Japanese Source). Here's a chart with a little bit of history:

Source: Market Realist / NYSE Arca

In a recent interview with Investment In Japan, Strategic Capital Fund Manager Tsuyoshi Maruki pointed out an interesting fact about Japanese listed companies:

"Between 1995 to 2014, the aggregate net asset of Japanese listed companies increased by 2.3 times, but in the same term both the aggregate interest-bearing debt of Japanese companies and Japanese GDP kept almost flat. This means that Japanese listed companies have accumulated assets in their balance sheets for almost 20 years."

Source: Investing In Japan

Apparently balance sheets can be strengthened during economically stagnant/recessionary times.

We pay $24 for $1 per year of S&P 500 earnings versus $17 for $1 per year of TOPIX earnings. The price to earnings ratio is just one metric, but it nevertheless makes me wonder if the earnings outlook for the S&P 500 companies are that much better than TOPIX companies.

Recent GDP per capita figures show that Japan is in a race to the bottom:

Source: Google / World Bank

However, GNI per capita figures paint a different picture:

Source: Google / World Bank

Clearly, the US is ahead of Japan by miles on both metrics. But then again, my question was more along the lines of "Is Japan really that bad?"

To start, is GDP a good measure of the Japanese economy? The primary difference between GDP and GNI can be summarized as location versus ownership. While GDP measures the monetary value of all the finished goods and services produced within a country's borders, GNI adds income received from foreign countries. At the very least, it looks like Japan's foreign investments are paying off for now.

Here is a further breakdown of price to earnings and price to book ratios within TOPIX:





(99 companies)




(399 companies)




(1,465 companies)



Source: Japan Exchange Group

In the meantime, the S&P 500 holds a P/E of 24.15 and a P/B of 2.76.

Let's be real, the population problem that Japan is running through is in uncharted territory. In order for Japan to maintain its living standards, the nation will have to look to productivity gains if fertility rates do not rise or immigration policy is not relaxed. As I have mentioned in a previous article, many Japanese companies have worked on developing their robotics technology.

And Japan's government debt? It has been mostly owned by its own citizens. More recently, the Bank of Japan started aggressively buying government bonds, removing a sizeable chunk of government debt from the private sector. Without going into a discussion of ages on who's got the better problem, one thing is obvious: The American debt problem and the Japanese debt problem are different.

Closing Thoughts

So robots are supposed to help with the population problem, the Japanese government debt problem is a different ballgame from the US government debt problem, and Japanese listed companies appear to have done okay through economic stagnation/recession. Sure, Japan faces serious problems, but none of them appear to be the end of Japan. If anything, it seems to me like we are either incredibly optimistic about the future performance of the S&P 500 or confusing uncertainty for risk in TOPIX. I think it is at least worth a shot for the investor to run a few screens on Japanese companies, especially since net-nets still exist on that side of the world.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.