Japan lost, but not dead, in deflation


For Japan, the 1990s are commonly referred to as the “lost decade.” Those that know me are aware that I look beyond that and actually regard a quarter-century as the appropriate “lost” duration. However, if one really thinks about what has transpired and where we are today, it is rather impressive that Japan continues to function in much the same way. Similar to Jesper Koll, who is now head of Tantallon Research, I find promise in Japan’s sustained, and comparatively large, investment in capex.

The problem for equity investors is one of procyclicality. And unfortunately, the global recession has displayed all the things that could go wrong and did (among them, the velocity of capital fleeing; widespread asset correlation; and the lack of sovereign unity towards a concerted acknowledgment and solution). Meanwhile, interestingly, Japanese companies keep plugging away, while both domestic and overseas consumers, and investors, alike, keep shying away. Unsurprisingly, I see no change in the procyclical behavior of people, whether in government, the markets, or among consumers. It almost seems like a catch-22 to be publicly traded.

In closing, as we rapidly approach the extended Golden Week holiday, let’s remember that the economic situation could be far worse than what it is. A decent chunk of companies will report earnings prior to GW, while a majority will be reporting after. The mood seems to be one of deflated expectations that go hand-in-hand with deflated results and outlooks. Although deflated does not mean dead, it means for the time being a misguided cap on the promise of what could come out of all the capex. The reality is that the best way to play Japan is either to be a trader, or to look for dividend yield supported by stable cash flows. In all likelihood, the Nikkei remains range bound: 7,000 at the bottom and 9,000 to the upside.