A rare event occurred this year. As the Japanese stockmarket slumped to its mid-March low, the falli...
A rare event occurred this year. As the Japanese stockmarket slumped to its mid-March low, the falling index pushed up the dividend yield sufficiently for it to overtake the yield on benchmark 10-year JGBs (Japan government bonds). The last time there was such a negative yield gap was in 2003, and the time before that was 1998. We suspect the last time before 1998 where equities yielded more than bonds was before the Second World War. Such an unusual occurrence should be treated with respect - the Tokyo market is cheap on a very big scale.
The years 1998 and 2003 were marked by doubt, fear and uncertainty, dominated by banking crises.
In April 2003, this climaxed in a panic that the whole Japanese banking system was verging on collapse. It was a once-in-a-lifetime moment: the Nikkei average fell below 8,000 (the 1989 peak was almost 39,000) and the yield on 10-year JGBs slipped below 0.5%.
This year is rather different. There may be concerns about monetary policy, but they focus more on whether the Bank of Japan will tighten too aggressively, rather than whether it has run out of props for the economy.
There may be a banking crisis elsewhere around the world, but it is not in Japan. Japan cannot escape unscathed from turmoil in the rest of the world, but the country's involvement is tangential - this is not Japan's fight.
One more feature of 1998 and 2003 is worth recalling: the stockmarket plunge that culminated in a negative yield gap turned out to be an investment opportunity - it was the prelude to a sharp market recovery. If that was true then, when a full-blown crisis was apparently running out of control, why not now?
In all places and at all times there are risks; reasons for fear and hesitation. Yet by March 2008, Japan's equity market valuation had slumped to an extreme associated with a collapsing banking system - but without the collapsing banking system.
You don't need to be as contrarian as we are in our approach to investment to realise that the balance of risk doesn't get much better than that.
- Equity market yield is above that of 10-year JGBs, a very rare occurrence
- When valuations were this low before, they proved to be good buying opportunities
- The banking crisis affecting other developed markets is not Japan's fight.
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