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That Time When Japan Was The Best Market In The World

December 04,2018 20:44

Today, most of the world has given up on Japan. Abenomics, the vaunted economic policies of Prime Minister Shinzo Abe aimed at once-again unlocking Japan Inc.'s potential, have been declared DOA. But at prices that leave it for dead, Japan once again ...



Photographer: Tomohiro Ohsumi/Bloomberg

The best bull market in history was not the dotcoms in the nineties, nor the energy stocks in the aughts, nor the Dow from 1982 through 2000. It was the rise of markets in Japan from 1950 until 1989, a nearly four-decade stretch when the Nikkei delivered a 21% annualized (or an astonishing 157,015% compounded with dividends reinvested). And that was in Yen terms.
In dollars, an investor did even better, generating 24% per year or 399,671% total. $10,000 invested in those dark days in Japan after the war would have become near $50 million by 1990—no typo there. You can see why, in 1989, the land under Tokyo's Imperial Palace was worth more than all of California. You could have done almost as well as Warren Buffett by just buying Japan and holding for 40 years.
Of course, the result was one of the largest bubbles in history—one which, arguably is still unwinding today. At the height of the Nikkei's insanity, the Nikkei was trading at a price-to-earnings ratio of approximately 70 and the cyclically adjusted p/e (CAPE ratio) was 90. The result has been a prolonged deflation in asset prices. Even 29 years on the Nikkei is still just 22,036, down from 38,957 in 1989. Due to dividends, a dollar-denominated investor would have a small positive return if they invested at the peak, but just barely.
Today, most of the world has given up on Japan. Abenomics, the vaunted economic policies of Prime Minister Shinzo Abe aimed at once-again unlocking Japan Inc.'s potential, have been declared DOA. But at prices that leave it for dead, Japan once again represents compelling value. At 13 times forward earnings, 1.2 times book value and 5 times operating cash flows, Japan is as cheap as anytime since the 1960s.
And then there are the quiet facts, as Peter Lynch used to call them. In the wake of World War II, the catalyst was the US-funded redevelopment of Japan during the occupation from 1945-52, which expended $1.9 billion to prime the pump of recovery. Today the catalyst will be improved corporate governance. Japan is once again reforming: improved corporate governance is restoring shareholders' faith that their interests will be served.
An investor would be foolish to invest $10,000 expecting $50 million again in Japan, Bitcoin or anywhere else. But for reasonable returns going forward, the type fueled by dirt-cheap prices and a rosier investment climate, punters should once again look East.

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