Japanese stocks have been a big disappointment for two decades now, talk about a contrarian investment idea. But all things come to an end, and Japanese authorities seem determined to devalue the Yen as much as necessary in order to finally reignite the economy. Time will tell if a weaker currency is what Japan really needs, but this is a major macroeconomic development which will have important investment implications over the following years.
The Country of the Rising Yen
The strength of Japan's currency has been quite surprising, not only because of its magnitude, but also due to its context and consequences. The Yen has been rising in spite of stagnant economic growth and low interest rates, and has been a major concern for economic policymakers over the last years.
But several variables are signaling that the era of a strong yen may finally be reaching and end. On one hand, there is more consensus than ever among politicians and Central Bank authorities regarding the need to finally devalue the Yen to a considerable degree. Deflation has proven to be a far more serious problem for Japan than inflation over the last twenty years, so aggressive monetary easing and all kind of currency interventions should be expected in the near term.
One of the biggest reasons for the Yen appreciation in spite of low interest rates in Japan has been the country's remarkable saving culture. The Japanese have always been big savers, keeping their money in the bank as opposed to spending on imported goods like in the US, for example. But that seems to be changing: the household saving rate fell to 7.3% in 2011, a big difference from the 20% zone where it was during the 1980s.
Demographic trends may be an important factor behind these changes, Japan has a very low fertility rate of 1.2, and life expectancy is among the highest in the world. The Japanese population is getting older, and this means lower savings as people start spending their retirement funds instead of saving their money for the future.
Japanese authorities have unsuccessfully tried to devalue the Yen for a long time, but now they are trying harder than ever. Besides, demographic trends are providing an important tailwind for their efforts. Nothing lasts forever, and the amazingly rising Yen will be no exception to the rule.
Falling Yen, Rising Stocks
Japanese automakers like Toyota and Honda could be among the biggest beneficiaries from a Yen devaluation. These companies are recovering market share in markets like the US after the 2011 earthquake and tsunami which materially affected production levels. A cheaper Yen may be just what these companies need in order achieve lower costs in such a competitive industry.
China, on the other hand, has been showing some worrisome trends as political conflicts between the two countries have created a strong negative feeling towards Japanese automakers from Chinese consumers. Investors need to monitor the China situation closely, because it could create serious problems for Japanese automakers if it becomes and enduring dispute.
Kubota is a manufacturer and exporter of machinery for construction and farming, the company is benefiting from rebuilding efforts in Japan and has a big international presence in other areas like pipes and valves for use in municipal water supplies, industrial engineering systems, air conditioners and vending machines among other products. A cheaper Yen would clearly be a good thing for Kubota and its international growth strategy.
Shares of Kubota, however, are more expensive than those of American competitors like Caterpillar or Deere . The Japanese company trades at a P/E of 16.5 and has a dividend yield of 1.6%. Caterpillar has a cheaper P/E of 8.5 and a higher dividend yield of 2.5%. Deere is materially cheaper too, with a P/E of 11 and a dividend yield of 2.2%. Kubota is in the right place to benefit from a depreciated Yen, but investors should probably wait for a pullback before pulling the trigger.
Money Grows on the Tree of Persistence
The Japanese proverb quoted above may be a good one to illustrate the case for investing in Japan. After years of persistence trying to devalue the Yen, the Japanese money tree may be about to bear some fruit.
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