Is Japan a share bargain too good to ignore?

The past 20 years have not been great for investors, but things may be on the up

Few things are more irritating than finding that perfect bargain item only to see it has become even cheaper the next day. Buying Japanese shares over the past 20 years has been a similar story and has certainly not been for the faint-hearted, with investors nursing significant losses this year alone.

But at such a cheap price compared with the rest of the world, it might be worth asking whether Japan is a bargain too good to ignore and is it ready to make a comeback?

"It's almost become a badge of honour to say 'I've had nothing in Japanese equities' – because it's been disastrous for more than 20 years," says Tom Becket at PSigma Investment Management. "But I think the Japanese equity market could double from where we are now: It could go from around 10,000 to 20,000 in three to four years."

There are certainly a few arguments in favour of Japanese equities. Not only are they cheap, but they offer attractive yields – higher than government bonds and US equities – and are distinctly under-owned, even widely hated.

And if the market does start to rise, it could surge rapidly as people pile in to ride the wave. So why, then, has buying Japan not come good and how has the market managed to see two lost decades?

"It's been fighting against deflation for 20 years, which has been an issue," says John Husselbee at North Investment Partners. "They have poor demographics versus the rest of the world," he adds, pointing to the country's extremely high proportion of elderly citizens.

"But the real challenge is the strength of the yen," says Mr Husselbee. "The yen is a threat to the profitability of exporters. So the Bank of Japan has tried to weaken it." At some point, though, the tide will turn and the yen weaken. When this happens, the pressure will be released on Japanese stocks, allowing them to rise. But calling when this will happen is anyone's guess.

Another stumbling block for the country is that the government owes a lot of money, but the people who hold a large chunk of the debt are Japanese residents. "There needs to be a transfer of wealth from the populous to the government," says Rob Morgan at Hargreaves Lansdown. "But how that happens when the political framework doesn't work that well is debatable."

So what would it take for a turnaround? "It could be a slow chipping away of problems – it might not be immediate," says Mr Morgan. "It will take renewed interest from international and domestic investors and it's a bad sign that the locals are content with bonds – it looks as if they aren't interested in equities."

Growth in Europe and the US would be a large factor that could help ignite the Japanese market, as investors' confidence starts to return. But you could buy now as the market is about the cheapest it's ever been, though don't hold your breath. "It's for the long term," says Rob Burdett at Thames River Capital. "There may be something around the corner, but it's harder to see a catalyst there than in other parts of the world."

But even if it seems prospects for Japan are attractive, the investment is not without risks and is perhaps more suited to the intrepid investor. "Japan is really a high-risk sector and therefore should be kept to less than 10 per cent of your equity portfolio, as an absolute maximum," warns Philippa Gee of Philippa Gee Wealth Management. "There is also such uncertainty over whether Japan will regain its position of strength, to the point that some fund managers have totally written off the sector as a core investment approach," she says.

Despite the risk the market isn't going anywhere any time soon. Be prepared to hold on to a bargain, as it could be a while before its value grows.

Emma Dunkley is a reporter for citywire.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Sport
Australia vs New Zealand live
cricket Follow over-by-over coverage as rivals New Zealand and Australia face off
News
Zayn has become the first member to leave One Direction. 'I have to do what feels right in my heart,' he said
peopleWe wince at anguish of fans, but his 1D departure shows the perils of fame in the social media age
Life and Style
Researchers found that just 10 one-minute swill-and-spit sessions are enough to soften tooth enamel and make teeth vulnerable to erosion
health
News
i100
Arts and Entertainment
The Regent Street Cinema’s projection room in the 1920s
film
News
Leah Devine is only the ninth female to have made the Young Magician of the Year final since the contest began more than 50 years
peopleMeet the 16-year-old who has set her heart on being the first female to win Young Magician of the Year
News
Jonathan Anderson was born in Northern Ireland but now based between London, where he presents a line named JW Anderson
peopleBritish designer Jonathan Anderson is putting his stamp on venerable house Loewe
News
Andy Davidhazy at the beginning (left) and end (right) of his hike
video
News
Taylor Swift is applying to trademark song lyrics from 1989
people
Voices
The popularity of TV shows such as The Liver Birds encouraged Liverpudlians to exaggerate their Scouse accent
voicesWe exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
    How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

    How to make your own Easter egg

    Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
    Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

    Bill Granger's twist on Easter Sunday lunch

    Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
    Joe Marler: 'It's the way I think the game should be played'

    Joe Marler: 'It's the way I think the game should be played'

    The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
    Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

    Cricket World Cup 2015

    Has the success of the tournament spelt the end for Test matches?
    The Last Word: Justin Gatlin knows the price of everything, the value of nothing

    Michael Calvin's Last Word

    Justin Gatlin knows the price of everything, the value of nothing