Predicting a recovery in Japan’s financial markets is perilously difficult. After the recent economic renaissance, Japan’s equity market enjoyed a stellar performance in 2005, only to disappoint hugely in 2006. Analysts are already making cautious noises for this year.
They might yet be proved right, of course, but consider the economic outlook and the country’s demographic challenges and it seems difficult to avoid the conclusion that, on a medium-term view, Japanese equities and real estate assets look increasingly attractive.
Bankers in Tokyo will tell you unanimously that the financial restructuring is over. Corporate Japan is in rude health and has entered growth mode amid renewed confidence. M&A is the talk of the town, the yen and interest rates remain low in real terms and asset prices remain attractive.
But absent from the investment party thus far are Japanese investors. Brokers say that foreign money that pushed the stock market so hard in 2005 has become disillusioned at the pace of recovery and is finding other Asian markets more alluring, notably China.
Is it time then for the Japanese investor to step into the breach? The obvious answer is yes, but there is precious little evidence of that happening. Domestic institutional investors have not noticeably increased their allocations away from their obsession with Japanese investment-grade bonds, and the poor local punter is still licking his wounds after the Livedoor and Murakami scandals knocked the smaller company-dominated retail market for six.
Although Japanese investors might continue to avoid investing for some time yet, they cannot do so indefinitely. And as the demographic impact of a relentlessly falling birth rate ages the population, the need for higher returns from savings to fund retirement increases. At some point, the Japanese will no longer be able to afford not to be invested in their own markets.
There are signs already that this is happening. Commercial property prices are rising, and bank lending is increasing as companies invest. As the corporate recovery strengthens wages will eventually rise and, with it, confidence and disposable income.
