Given Japan's soaring public debt level — the highest in the developed world — it might seem fair to ask whether investors are likely to be scared away from the country. The debt problem and the Kan government's apparent inability to come up with a credible plan to address it led Standard & Poor's to lower its rating on the country in late January to AA- from AA.
So far, it seems that the debt issue and the downgrade will have little impact on Japanese corporations, many of which carry a higher credit rating than that of the government itself. While borrowing costs may be somewhat higher for Japanese companies that raise debt at levels pegged to the sovereign rating, the ability to attract equity appears to be strong.
The Nikkei 225 rose 1.8 percent to 10.457.36 on Wednesday. The Topix Index also rose 1.8 percent and is up 3.4 percent for the year. As Bloomberg notes, the Topix is trading at a multiple of 16 times estimated earnings, which is richer than the S&P, which is trading at 13.7 times earnings, or the Stoxx Europe 600, which is trading at 11.3 times earnings.
By some measures, Japanese stocks remain a good value, though, according to Brent Fredberg, a senior analyst at Brandes Investment Management in San Diego, which has about $50 billion in assets under management. “We are still overweight in Japanese companies. We find a lot of undervalued companies there,” Fredberg says.
Fredberg, who sits on the firm’s big cap investment committee, says companies in Japan have an average price-to-book ratio of 1.3, which is low by historic standards — just 90 percent of the five-year average. U.S. companies have a price-to-book ratio of about 3.4, which is relatively high — about 1.4 times the five-year average. What is more, the dividend yield in Japan is high, too — 1.6 percent, compared to 1.4 percent in the U.S.
There are other factors that favor many companies in Japan — such as lean balance sheets and the opportunity to benefit if the yen eases in value, as many people expect it will, according to Fredberg.
Export-driven sectors such as Japanese automakers are benefiting from an increasingly strong global economic recovery, especially in the U.S. market, a major destination for Japanese cars. Like many Japanese companies, they have figured out ways over the last few years to benefit from global growth even when the economy at home is weak.
For example, Honda said on Wednesday that it will shift some CR-V sport utility production to Ohio and Mexico. That move will counter the effects of a rising yen, which have diminished the value of producing goods and home. And it will bring the company even closer to the North American market.
On the domestic front, some analysts believe that Japanese real estate is under priced. Real estate stocks in Japan rose on Wednesday after Credit Suisse analyst Masahiro Mochizuki said in a research note that property prices are likely to rise over the next 12 months.
The economy in Japan is beset with fiscal troubles, but it is hardly alone. Meanwhile, Japanese companies are competitive in the global market. Japan even allows rice imports into the country, a sign market forces truly are in play. And while Japan’s Nikkei might be valued a bit higher than equities elsewhere in the world, it is still way below its all time high of 38,916, established way back on December 29, 1989.
