Shares embark on slow ascent

Six years after the bubble burst, Peter Tasker sees slow progress

SO FAR this decade, the land of the rising sun has looked more like the land of the false dawn. Valiant attempts to "call the bottom" of the Japanese stock market have proved premature as shares have been repeatedly buffeted by a series of disasters, man-made and natural.

For foreign investors, especially those investing out of weak currencies such as sterling, the damage has been mitigated by the turbocharged performance of the yen. Still, there is no getting away from the fact that the performance of the underlying shares has been exceptionally poor.

Over the past five years, the Japanese market has experienced four major falls of 30 per cent or more to less than half its all-time high of 39,000. With the exception of the 1987 crash, the last time the US or UK markets experienced a 30 per cent fall was in the mid-Seventies.

Taking the decline in the stock and property markets together, the destruction is estimated at about 15 per cent of total national wealth - a greater loss than in the Second World War.

It is tempting to conclude that a stock market that has undergone such punishment must be cheap. But once-in-a-generation bear markets of this sort do not happen without good cause. And when they do happen they change the landscape out of all recognition.

The Japanese refer to their late 1980s boom as "the bubble economy". The bubble was inflated by the Bank of Japan, which allowed credit to rip. Prices of assets went through the roof. The long-delayed rise in interest rates was the pin that burst the bubble.

Six years later, profits have been recovering but are still low. Most importantly, share prices in relation to profits remain high. Assuming a return to a pre-bubble relationship between share prices and profits, it might take until the year 2018 for the stock market to return to its all-time high.

You can construct more optimistic scenarios. But unhappily for the foreign investor, they require a much weaker yen, which means currency losses.

So is Japan a write-off in investment terms? Not exactly. First, Japanese managements and policy-makers are at last getting to grips with structural problems. Sharp cuts are being made in the manufacturing workforce, and interest rates have been brought down to super-low levels. This should remove the risk of another stock market meltdown. Secondly, a new generation of aggressively managed companies is floating on the stock market.

But don't expect tiger-like returns from an economy still feeling its way around serious structural problems.

Bigger companies are unlikely to return more than 40 per cent by the end of the century. But if all goes well, the medium and smaller could easily double in price.

o Peter Tasker is Tokyo-based investment strategist for Kleinwort Benson; and author of "Inside Japan" (Penguin).