For the past several weeks, or ever since Kyle Bass laid out his macro predictions for Japan even more clearly than he did a year ago, I’ve been doing some research on Japan. In a nutshell, it seems very likely that Japan will be the next country to experience a serious debt crisis.
There are many reasons for this, but I’ve looked at some interesting anecdotal evidence that suggests it will be very hard for Japan to make the necessary social and corporate changes to become more productive. For example, read this article about Sony Corporation, which details the rise and fall of the company. Stableboy Selections continues on this subject, arguing that its now Japanese companies (instead of American companies) that are making inferior style electronics. And then, given the recent scandal surrounding Olympus, you have to ask yourself whether there are more Japanese companies that have hidden losses through accounting tricks or fraud as opposed to admitting to mistakes and losses?
Further reading: the latest letter from Hayman Capital provides additional insight into the debt problems around the world.
What it has going for it is that it is the cheapest stock market in the world on many long-term valuation metrics, as GMO and others have discussed. Enron and WorldComm didn’t mean that fraud was pervasive in US public companies and the same will be true in Japan – fraud is part of human nature but it is usually infrequent (If any country were to be singled out though I think it should be China). I was looking at a company last week in Japan with Current Assets – Total Liabilities that were 120% of the market cap, a 4% dividend yield, trading at 3.5x TTM net income and 6x its five year average net income (it’s been profitable every year). It does not have the typical characteristics of a fraud (it has consistent capital outflows in the way of dividends and no equity or debt raises). I agree with you about the macro issues, but you can’t dispute that there are lots of companies that are very very cheap, much cheaper than anywhere else in the world including Europe. If they devalue the currency stocks could still do well in USD terms over the next 5 years – especially exporters with revenues in other currencies. If they default, atypical for a fiat monetary system, it’s a harder call. At some price anything’s a buy though!