Thursday, August 19, 2010

Japan: The World's Cheapest Developed Market

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Japan in recent years has been unfashionable and largely ignored by investors. Home to the world's third largest economy as well as global brands like Sony and Toyota, Japan, has been an economic non-starter for more than a decade. Japan has been the most disappointing major stock market in the world over the past 20 years, with the Nikkei 225 at barely a quarter of its 1989 peak but with the arrival of a new political era last year, foreign ownership in Japanese stocks has edged higher slowly. The Japanese Stock markets might have had a 20 year old bear cycle but so far the country has managed to survive and with a limited downsize, it would not be unfair to say that Japan has put its worst behind and is ready to slowly crawl its way back. The economic revival of sorts will definitely not happen overnight or in a couple of years, but the Japanese economy surely has the potential to kick start a positive movement offering money creating opportunities for the global investors.

Data released by the Tokyo Stock Exchange shows that foreign ownership of Japanese shares rose to 26% for the year that ended in March, up from 23.5% a year earlier.

Adding to Japan's growth revival opportunity is the neighboring red dragon of china, which recently surpassed Japan as the second largest economy of the world. There is, of course, a danger that the Chinese will muscle in on areas where Japan is currently dominant but experts believe the benefits of having such powerful neighbors ultimately might well outweigh the costs and would play favorably in Japan's favor.

The Japanese economy managed a 4.9% annualized growth for 1st quarter of 2010, marking 4 consecutive quarters of positive growth.


Japanese stocks are universally cheap. The average stock trades for about 1.4 times its book value that is roughly a 40% discount to the average U.S. or emerging market stock. With an extremely limited downsize, Japanese stocks offer the perfect low risk, high return opportunity.

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