Business textbooks all the time teach the Japanese business concepts of Kaizen, Kanban, Andon and just-in-time production. Despite this, the actual market valuations of Japanese firms have been lagging for a very long time (principally my entire life).
What some investors fail to know about this historical anomaly is how massively overvalued the overwhelming majority of firms in Japan were in 1989. It’s as if the complete Japanese stock market had expectations of Tesla- or Nvidia-level world domination.
Here are some insights from Ben Carlson A wealth of common sense:
- From 1956 to 1986, land prices in Japan rose 5,000%, although consumer prices only doubled during that point.
- At the height of the market, it was estimated that the worth of the Imperial Palace grounds exceeded the complete real estate value of California or Canada.
- In 1989, the Nikkei’s price-to-earnings (P/E) ratio was 60 times trailing twelve months.
- Japan accounted for 15% of the world stock market capitalization in 1980. In 1989 it represented 42% of world stock markets.
- From 1970 to 1989, Japanese large-cap firms grew greater than 22% per yr. Small caps rose about 30% per yr. That’s incredible growth over a 20-year period.
- Inventories increased from 29% of Japan’s gross domestic product (GDP) in 1980 to 151% in 1989.
- Japan was trading at a CAPE (cyclically adjusted P/E ratio, calculated using 10 years of inflation-adjusted earnings) ratio of nearly 100 times, greater than double what the US was trading at at the peak of the dot-com bubble became .
As for the constant naysayers who want to match the “lost decades” of the Japanese stock market with current market conditions, all we will say is that there isn’t any data to support this level of pessimism. In other words, there are market bubbles after which there may be the Japanese bubble.
As all the time, Warren Buffett, the celebrated investor and CEO of Berkshire Hathaway, was a little bit ahead of the sport on this issue. He has been buying up Japanese assets for several years. Buffett was quoted by CNBC in 2023 as saying, “We couldn’t be happier with the investment.” [in Japan].”
It’s also value noting that even Japanese stocks win “in the long run.”
If you invested $1 a day in Japanese stocks starting in 1980 (about $10,500 total), you’d have over $17,000 today (because of recent all-time highs).
This is despite Japan posting one among the worst stock market returns in history during this era. pic.twitter.com/2t8SG9xJfV
— Nick Maggiulli (@dollarsanddata) February 26, 2024
As Nick Maggiulli, creator of (Harriman House2022), within the tweet above, says for those who had began investing within the Nikkei 225 in 1980 (within the lead-up to the Japanese bubble), you’d still have an actual annual return of three.5% today (including dividends). ).
Carlson also points out that for those who had invested in a Japanese stock index within the early Seventies, the return would still be about 9% per yr, although the most important bubble of all time burst in the center. It’s just that each one future returns have been brought forward attributable to manic speculation – and investors have been waiting for firms to “grow into their valuations” ever since. After an extended wait for the earnings growth spurt to kick in, the valuation shoes finally appear to fit.
Of course, no such Japanese index fund existed at the moment. Today, Canadian investors can invest efficiently in Japan through exchange-traded funds (ETFs) comparable to the iShares Japan Fundamental Index ETF (CJP) or the BMO Japan Index ETF (ZJPN).
