The dividend yield of the Japanese stockmarket is rising, partly because dividends are growing but a...
The dividend yield of the Japanese stockmarket is rising, partly because dividends are growing but also more recently because share prices are falling. Having sunk to a low of 0.8% in January 2006, the yield on the Topix index is today standing at 1.5%.
At this level it now exceeds the yield on 10-year Japanese government bonds, a fact not unnoticed by a clutch of financial commentators who have also pointed out that historically this crossover of equity and bond yields has preceded a huge rise in the price of shares.
So should investors be hastening to increase their exposure to Japan at this time? The answer lies not in the emergence of this positive yield gap but instead in an analysis of the attributes of different companies in the market. Suffice to say high dividend yields and dividend growth are a powerful combination to create value in any market environment.
Over the last 15 years there has been no inflation in Japan. With no inflation, equities lose one of their most important roles, as a generator of real returns, as opposed to nominal returns earned from bank deposits and bonds.
Capital preservation is still a priority for the Japanese, which is why today savers continue to invest over 50% of their financial assets in bank deposits.
So what will make Japanese equities appeal again to domestic investors who have consistently sold shares since the late 1980s? Higher inflation would be one catalyst.
Cost-push inflation is more likely than demand-pull, but that would have to accompany a weaker yen - more of a possibility in our view, but not one likely to materialise in the immediate future.
With or without inflation we think the Japanese stockmarket needs higher and growing dividends, reflecting the business performance of the underlying company. Only then will investors take on extra equity risk.
In conclusion, then, we think that the argument for an imminent rise in share prices in Japan across the board is falsely based. However, we are confident that concentrating investments on 'exceptional' businesses will deliver handsome returns over the longer term.
- If the Japanese economy is indeed decelerating, earnings will fall and with that the momentum behind the recent increases in dividends;
- The paradox of the Japanese market is that good, cash generative, conservatively financed businesses trade at higher dividend yields than vulnerable, capital intensive, debt laden ones.
By Michael Lindsell, fund adviser, Close Finsbury Japanese Equity Fund.
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