From hot to not and back again, Japanese stocks have been a confusing lot the last couple years.
Japan's stock market is flying after the Bank of Japan surprised the world last week by increasing its bond-buying stimulus program. The Nikkei 225 index jumped nearly 5 percent the day of the announcement, and it's back in the black for the year. In the spring, it was down nearly 15 percent. That follows a stellar 2013, where the Nikkei soared nearly 60 percent.
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Underlying all the market moves is investor confidence in whether Japan can jumpstart its economy's too-weak inflation. Japanese shoppers and companies have grown accustomed to prices staying the same, which encourages them to delay purchases and investments. That weighs on consumer spending and restricts the economy.
To raise its inflation rate and jolt Japan, the country's central bank is pushing stimulus. Last week's surprise move caused the value of the yen to drop. That serves to make imported goods more expensive for Japanese shoppers and also boosts revenue for Japanese exporters.
Even after the big jump for Japanese stocks, they remain cheaper than their U.S. counterparts, says Taizo Ishida. He is the lead manager of the Matthews Japan fund, whose $683 million in assets makes it one of the biggest to focus solely on Japan. He recently discussed what U.S. investors can expect from the market. Answers have been edited for clarity.
Q: Why have Japanese stocks been so up and down?
A: If you look at the currency, the yen was stuck around 102, 103 to the dollar for much of the year. It didn't move. But all of a sudden in September, it started moving, and now it's almost 115. That's a huge move, and that prompted the rally for stocks. In the last three years, the currency market has led the stock market in Japan.
And then the Bank of Japan came out a few days ago with that surprise move. That just shows how committed it is to the fight against deflation.
Q: So the main goal for the Bank of Japan is to weaken the yen?
A: Always. Getting the currency weaker automatically gets prices up.
Deflation has been the No. 1 enemy of Japan for the last 15 years. It is really necessary for the Bank of Japan at this point to do something. What's interesting to me is that (Bank of Japan Gov. Haruhiko) Kuroda said that "whatever we can do, we will."
You can't do it only halfway. He's not going to stop. He can't say that the goal is to get the currency rate at 120, 125 to the dollar, but that's what he's really looking at.
Q: How confident are you that Japan can beat deflation?
A: I'm not 100 percent sure, but they're on the verge of getting out of deflation. This is a critical point, and that's why they made the surprise move.
Q: How do Japanese stocks compare with others around the world now?
A: I think Japan is cheaper than the U.S., and it has better fundamentals than Europe. Europe is a mess, and Japan is in much, much better shape. But to me, we look at individual companies, and I pay more attention to corporate governance issues and the bottom line.
Q: So how are things looking on the individual-company level?
A: Companies are paying more attention to shareholder value, whether it's through dividend increases, mergers and acquisitions or share buybacks. So many things are happening this year.
One of the problems in Japan is that profitability is not as high as it should be, and I think companies are paying more attention. The earnings numbers are coming out now, and they are really good. They're beating estimates.
The other thing you have to pay attention to is that companies like exporters are still assuming the yen will be around 100 yen to the dollar. That's really conservative. Stocks of exporters probably have more room to rise.
Q: How worried should U.S. investors be about the falling yen? It helps Japanese companies but dilutes their stock gains in dollar terms.
A: When the yen weakens, stock prices go up by more than enough to offset that. There's no reason to worry about that. It's not like India (where the Sensex index rose 9 percent in rupees last year but fell 3.5 percent in dollar terms).
Q: What other risks are there for Japanese stocks?
A: At this point, the U.S. economy is the world's only viable growth engine. China is very quiet, too quiet. Europe is dead. Japan is struggling to find growth. The U.S. economy has to be strong to pull Japan and other countries out. If you're a U.S. investor, and you're confident in the U.S. economy, I would say buy Japan. If you think the U.S. economy is not going to be that strong, then I wouldn't be that bullish on Japan either.