What Argument Can You Make in Favor of Japanese Stocks?
Can Japan's Nikkei Regain Its Footing?
This all begs the question: Can Japanese stocks rise again?
There are reasons to like Japan over the longer term, even as a strong yen contributes to Japanese corporate earnings downgrades. The “short Japan” trade looks increasingly crowded, Japanese stocks appear cheap (around 13x forward earnings) relative to their own history and to other markets, and Japanese corporate balance sheets in aggregate have low financing risk, BlackRock analysis suggests.
Market Realist – Japanese stocks appear cheap
Despite the strong yen and lower inflation affecting corporate earnings and broader economic growth, the Japanese (EWJ)(DXJ) market seems to be attractively valued after a ~14.6% fall year-to-date. Sellers dominated the market as the Topix short-selling ratio rose to 41% recently, the highest level in the last month.
Currently, the TOPIX is trading at a forward PE (price-to-earnings) multiple of 12.9x compared to 15.4x at the beginning of the year. Similarly, the MSCI Japan (DBJP) Index is trading at 12.7x compared to 15x in the first week of January. This level is much lower than other markets. For example, the MSCI World (EFV)(SCZ) Index is trading at a forward PE multiple of 16.5x while the MSCI ACWI is at 15.9x. On the other hand, the S&P 500 (SPY)(VOO) is trading at a higher multiple of 17.5x while the Stoxx Europe 600 Index is at 15.3x.
The lower valuation isn’t the only factor likely to drive the Japanese stock market. New corporate governance codes have many shareholder-friendly features that have also led to improvements in returns on equity. Plus, the sub-zero interest rate helps corporates manage their balance sheet efficiently without the risk of higher interest payments.
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