I’m tempted by timing only when I see a stock market on its knees, which means I have to consider whether to buy Japan. Does it matter whether prices may have further to fall, when they’re already down 55 percent from their peak in December 1989? “You’ll never be able to pick the bottom, but I’d bet that you’re closer to it now than you will be a year from now,” says economist Lawrence Krause of the University of California, San Diego.
If the Nikkei 225 stock index drops again, the optimists think it won’t fall much below 15,000–some 15 percent down from last Friday’s 17,459 close. Partly, that’s a technical bet. A new Nikkei 300 stock index was just launched in October to supplant the easily manipulated Nikkei 225, and it purged nearly one third of the old indexed stocks. Michael Bunker, head of the team running Global Asset Management’s Far East funds, says investors have been dumping the rejects, causing the 225 index to do worse than the market as a whole.
Buyers are also making a political bet. “The last time the Nikkei fell below 15,000, a lot of Japanese banks were on the verge of insolvency,” says Irwin Kellner, chief economist for Chemical Bank in New York. The banks count their stockholdings as part of their capital requirements. When capital erodes, they can’t lend much new money, which weakens business even more.
In August 1992, with the Nikkei at 14,309 and falling, the government rubbed its magic lamp and conjured up three mild doses of fiscal stimulus that, for a while, gave stocks (and banks) an illusion of deliverance. But when the trick didn’t work, the market fell back. Now the talk is of tax cuts, but still people dream of an easy way out. The word last week was that Japanese insurance companies were being urged to purchase stocks, which helped rally the Nikkei by 9 percent.
Krause believes that the combination of low interest rates (roughly 2 to 3 percent), the normal forces of cyclical recovery and a fiscal stimulus package should move the Japanese economy up by the second half of 1994–which means the bull market should start about now. “A contrarian view,” he concedes.
Which brings me to the pessimists, who think the Nikkei might drop to 14,000 or even 12,000. “There’s no evidence that government action to turn the economy will work,” Kellner says. Allen Sinai, chief economist for Lehman Brothers, calls this “a financial-crisis type of downturn, which can be particularly nasty.” He sees Japan as potentially unstable politically, with the worst economy and financial structure in its modem history. His guess: a five-year financial workout, keeping him light on Japanese stocks.
To T. Rowe Price money-manager Martin G. Wade, whose New Asia Fund doesn’t buy Japan, it’s all to the good that Japan may emerge from the repressive grip of its old Iron Triangle: the ruling-party politicians, the financial bureaucrats and the big-company industrialists who throttled discount competition. Still, he judges Japan a low-growth country compared with others on the Rim. “We’re not yet seeing signs of Japanese companies getting a handle on their costs,” he says–hard to do, in a country of lifetime employment. Japan-only money managers, like the Japan Fund’s Elizabeth Allan, are hoping for tax cuts and buying consumer stocks.
No one should carry Japan-bashing too far. This is a resolute country that turns out quality products at attractive prices, holds a huge savings pool for economic reformers to draw on and stands at the doorstep of Southeast Asia and the new China, the world’s faster-growing regions. So what if the market flops next year? Over 10 years, the Pacific Rim might grow by 300 or 400 percent, and Japan will grow with it.
That long-term view, however, makes a better case for diversified funds invested throughout Asia–including, but not dominated by, Japan. That leaves out index funds, which mimic the action of regional stock-market averages. In Asia, they’re so dominated by Japan that Vanguard’s indexed Pacific Portfolio is 80 percent in Japanese stocks. Nomura Pacific Basin, which sounds diversified, was recently more than 60 percent Japanese. Funds that include Japan but at lesser weights include the Dean Witter Pacific Growth Fund, Invesco Pacific Basin and GAM Pacific Basin, says Morningstar associate editor Jeff Kelley. The diversified funds also leave you less exposed to currency risk. Many Asian currencies move roughly with the dollar, whereas the yen doesn’t. This year Morgan Stanley Capital International’s Japan index, with dividends reinvested, rose 6.4 percent in yen but 21.8 percent in dollars, thanks to the yen’s rise against U. S. currency. But when the yen declines again (as it inevitably will), the value of Japanese mutual funds will also decline in dollar terms.
Although Krause likes Japan, he expects higher profits from Asia funds without Japanese stocks. On the other hand, bushels of money have been pouring into some pretty small stock markets in the region. Larry Jeddeloh, editor of The Institutional Strategist in Minneapolis, says today’s bubble markets are in China, Thailand and Hong Kong. As for the Nikkei, he thinks it will go nowhere for years and brands a long-term investment there “dead money.”
