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Why I still Hate Japan

madhedgefundtrader's picture




 

Like watching an old friend who fell from the high life as a special bracket investment banker to a stumbling drunk, I can’t help but pity Japan’s beleaguered stock investors. Since peaking in 1989 at 39,800, they have been mired in a 20 year bear market, the longest in history, and there is no sign of the index climbing substantially off the current 10,000 level anytime soon. I have watched with dismay as GDP growth shriveled from a white hot 10% in the sixties, to 7%, 5%, 3%, and now 1%, and share prices reflect this.

Not even the Japanese want to buy their own stocks, with foreign institutions accounting for up to 60% of trading volume on a good day, while domestic ones generate a paltry 10%. Local investors would much rather buy emerging market funds, currency funds, bond funds, anything but their own equities. This explains the miserable 1.15% yield investors get on ten year JGB’s. Nikkei stock index volatility is driven by a handful of foreign hedge funds that rush in, and then right back out.

Although the government launched one Keynesian reflationary package after another during the nineties, the end result was a massive accumulation of debt and a thousand “bridges to nowhere.” Obama take note.  In four decades I have watched the country degenerate from a paragon of fiscal rectitude to one of the most debt burdened nations on the planet. The country’s total debt, net of cross holdings, is 111.6%, and is rocketing towards the 140% now seen in Greece.

Japan used to have a great story up until the eighties, when they were the world’s low cost provider of quality manufactured goods. The Nikkei was the place to be when Japan’s share of the US car market soared from 3% to 40%, and the yen went hyperbolic from ¥360 to ¥78. But then a beefy new kid showed up in the neighborhood called China which has taken over that role. Sure, the quality isn’t there yet, but you can’t beat those prices! This is why global investors see Asia as a China only bet, and avoid the Land of the Rising sun like the plague.

Equity price earnings multiples have fallen from 100 down to 15. But even that seems high if the country is only ably to eke out 1% GDP growth rate for the foreseeable future. An appreciating yen serves only to tighten the screws on the country’s prolific exporters even further. Now it seems they want to raise VAT taxes too. That will simply hobble consumption further. Some 12.7% of Japan’s equity is still held in corporate crossholdings, a relic from the old zaibatsu days, that will continue to weigh on share prices. Great thing to have in a rising market, but not so good on the downside.

Japan has the world’s worst demographic outlook (click here for my analysis at http://www.madhedgefundtrader.com/april_12__2010.html ). They’re just not making Japanese anymore. Changing governments as often as I change my socks doesn’t exactly inspire confidence among foreign investors. What does the center left Democratic Party of Japan (DPJ) stand for, anyway? Politics has degenerated into a scrum of conflicting interests to see who gets a share of an ever shrinking pie.

Independent research analyst Darrel Whitten of Japaninvestor.com (click here for the site at http://www.japaninvestor.com/ ) believes that Japan has to engineer a substantially weaker yen to stimulate exports, aggressively use the Bank of Japan’s balance sheet to create inflation, and draw up a new pro growth economic plan, much like the Ministry of International Trade and Industry (MITI) successfully engineered in the fifties. I won’t be holding my breath. The strong leadership and ironclad consensus that created the Japanese economic miracle isn’t to be found these days. Until then, Japan will, at best, be a single stock story, with money pouring into companies that can still prosper against these incredible force nine gales.

I have made such a massive personal investment in Japan, living there ten years, learning their impossible language, and publishing several books on the topic. I wish I had better news to report. But I don’t.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two and a half years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

 

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Thu, 07/15/2010 - 13:52 | 471536 three chord sloth
three chord sloth's picture

Japan is an object lesson for all who believe in the planned economy.

To put it simply, a planned economy can work, but only if your nation is far behind the leaders and playing "catch-up". Once you've caught up, however, all that centralized economic machinery destroys any chance you have of pulling ahead.

A planned economy is built on three things:

1. Study the economic leaders to figure out what worked...

2. Honesty study yourself so you can correctly apply the lessons from step 1...

3. Create a centralized command-and-control mechanism to apply the lessons from steps 1 & 2.

Of course, that means once you've caught up to the world leaders in any particular industrial/service sector you are lost. The map you built in step 1 no longer helps... you've  entered uncharted territory.

The way forward is now guess work... and since all of your businesses in a particular sector are designed to move in lock step, a single wrong guess doesn't take down a single business, it destroys a whole sector! For example look at the Japanese computer chip industry. A couple of bad guesses about the future direction of the chip market, made back in the late 80's - early 90's by MITI, has left Japanese chip makers in a hole they still haven't crawled out from.

A planned economy may sometimes be workable when you're following the well-trodden path from agricultural society to industrial, but once you've gotten there all of that machinery is more likely to drive you over a cliff than take you to the promised land.

Thu, 07/15/2010 - 11:44 | 471103 Gimp
Gimp's picture

"I have made such a massive personal investment in Japan, living there ten years, learning their impossible language, and publishing several books on the topic" - MHFT

Is MHFT a "secret agent". He has lived everywhere and knows people in high places. Impressive.

If next week he says he lived in China or Thailand  for ten years I will get suspicious.

Thu, 07/15/2010 - 11:57 | 471136 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

This includes about 5 other careers he has claimed in posts like airline pilot and etc.

Thu, 07/15/2010 - 10:42 | 470945 mephisto
mephisto's picture

Worked for Nomura. Briefly.

Thu, 07/15/2010 - 10:01 | 470804 Gimp
Gimp's picture

Worked for a Japanese Company in the 1990's. I can tell you their management -lets be kind- is very, "strange". They will plan ad nausea and still make the wrong decisions. Customers needs and wants barely addressed. Bureaucratic model to the extreme. The six major Japanese industrial firms which control every other Japanese company, were funded by  the government/public money in the 1940's, 50's and 60's. Without public support their success and industrial achievement would have been limited.

Best things from Japan - Ninja Warrior Challenge and Sushi!

Thu, 07/15/2010 - 15:42 | 471884 Kobe Beef
Kobe Beef's picture

Yup. The Bureaucracy has strangled the Japanese people. They asked for it.

The Bureaucracy is ruled by those who followed all the rules & jumped through all the hoops of the rigorously inane exam system to graduate from the Imperial Universities. They then spent their adult lives squirming up through the ministerial ranks by avoiding responsibility (think, blame) & deferring to their superiors.

By the time one rises to anything like decision-making power within the Japanese hierarchy, one is too old, too out of touch & too complacent to even conceive of change. Thus the continuation of all these failed policies. Since these dinosaurs are incapable of leadership or original thinking, the Bureaucrats merely focus on maintaining/centralizing control or dogfighting with other Ministries.

The Japanese people are somewhat aware their country has become one large Institutional Failure-- but being Japanese, are unable to conceive of doing anything differently, and are unwilling to take any action unsanctioned by their peers.

In short, Japan does not have a future. They will bury their heads in the sand until the power goes out. And then they will be devoured whole. as in raw. like sushi.

Thu, 07/15/2010 - 09:53 | 470784 DR
DR's picture

 

http://english.caing.com/2010-03-15/100126807.html

Our Next Economic Plague: Japan Disease
Growing old is hard, but watching formerly vibrant economies choke on debt and wither away is downright ugly

Thu, 07/15/2010 - 09:43 | 470757 Grand Supercycle
Grand Supercycle's picture

 

As warned about for some time, EURUSD daily chart is bullish . . .

http://stockmarket618.wordpress.com/about

Thu, 07/15/2010 - 09:35 | 470735 Oh regional Indian
Oh regional Indian's picture

Japan's "success" has to be the most stage-managed, crony-capitalist, mis-managed sham perpetrated on the world (and the poor Japanese whose world is going to come crashing down around them).

Besides awesome manufacturing and a national obsession with detail, the Japanese are not very good with "business". Their mind-set is still on the waybackmachine.

Will it's collapse lead or lag the US will be interesting.

I should know by the way, I was the CEO of a Japanese company in India for 3 years.

ORI

http://aadivaahan.wordpress.com

Thu, 07/15/2010 - 09:34 | 470734 Oh regional Indian
Oh regional Indian's picture

Japan's "success" has to be the most stage-managed, crony-capitalist, mis-managed sham perpetrated on the world (and the poor Japanese whose world is going to come crashing down around them).

Besides awesome manufacturing and a national obsession with detail, the Japanese are not very good with "business". Their mind-set is still on the waybackmachine.

Will it's collapse lead or lag the US will be interesting.

I should know by the way, I was the CEO of a Japanese company in India for 3 years.

ORI

http://aadivaahan.wordpress.com

Thu, 07/15/2010 - 09:26 | 470708 Chartist
Chartist's picture

Let's see, Japan is land locked and built up, has no natural resources and cannot build a military....I'd say they're screwed.

Thu, 07/15/2010 - 10:34 | 470924 mephisto
mephisto's picture

landlocked? no military?

I think you're confused with Switzerland.

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