If all the surprises to hit investors of late, one of the most curious is that Japan is home to the best-performing major stock market this year. While America's benchmark index, the Dow Jones industrial average, has plunged nearly 13 percent, its Japanese counterpart, the Nikkei 225, has held up relatively well, growing 3.9 percent in dollar terms this year. Though slender and partly inflated by the yen's rise against the dollar, these gains suggest that Japan is worth a second look for those willing to venture overseas to broaden their portfolios.
As in past years, Japan's stock market has taken its cue from a mixture of positive news and relief. This year, a recovery in exports is pulling the country out of recession, lifting shares of electronic, semiconductor, steel and auto companies. Despite high unemployment and falling wages, the Japanese have continued to shop, stabilizing the largest part of the economy, consumer spending. Investors were also encouraged in February when the government took steps to head off a banking crisis.
Absent, too, are the accounting scandals and mammoth bankruptcies that have engulfed US and European markets, helping turn the Nikkei, in some small way, into a haven. Indeed, Japan's decade-long bear market has washed away much of its own bubble-era excesses and Internet-driven mania.
While that has pushed the Nikkei index 75 percent below its 1990 peak, it also means prices for some of the world's biggest manufacturers are at their lowest levels in years. "Don't overestimate the weakness in Japan," said Philip Lung, senior fund manager at UAM Investment Trust Management in Tokyo. "People are looking for the downside" but should consider the positives, too.
With US$300 million under management, Lung's funds, sold through two Japanese banks, have returned more than 4 percent each this year. Japanese small-cap funds, too, have performed relatively well. According to a ranking of global offshore investments compiled by Business Week and Standard & Poor's, Japanese funds held 21 of the top 25 spots in the second quarter, with investments managed by Jardine Fleming, Fidelity and Mercury all returning more than 10 percent.
Fund managers in Tokyo, though, all temper their optimism. Domestic banks are still a mess, burdened with bad loans and struggling to eke out profits. With interest rates near zero and the deficit growing, the government and central bank have exhausted most of their fiscal and monetary arsenal.
The upheaval in US markets has also led foreign investors, who were big buyers of Japanese stocks earlier this year, to sell Japanese shares to lock in profits and offset losses back home. That has taken some of the shine off the Nikkei in the last six weeks. Fortunately, Japanese retail investors have picked up some of the slack, keeping a floor under the stock market, at least for now.
As worrisome, figures out last week showed the US economy growing at a slower rate than previously thought. Since one-third of Japan's exports are shipped to America, if the US dips back into recession, it could take Japan with it.
"Quite frankly, the US economy is crucial to everyone," said Simon Jones, who helps manage US$14 billion for JP Morgan Fleming Asset Management in Japan. "We're not under any illusions; if the US slows, Japan will, too."
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