In most stock markets, there are some shares that offer high dividend yields – like the banks in the UK at present. But in Japan, the average yield on shares is higher than that on safe government bonds - a classic buy signal.
On average, Japanese shares give investors an income yield of 1.8%, which sounds low but remember that historically there has been no inflation, while government bonds yield 1.7%.
Jupiter recently pointed out that on the three occasions in the past decade when shares yielded more than bonds, a rise of at least 40% in the stock market soon followed.
Big in Japan
In the UK, the 130 shares that make up the FTSE 350 High Yield Index give an average dividend yield of 5.96%, which is almost 1% more than UK government bonds. But the FTSE 100 Index of the biggest 100 companies yields less than bonds at 4.34%, as do the broad US and European share indices.
So far, only Japan has crossed this particular threshold, mainly because a lot of Japanese companies have been raising their dividends much faster than their profits. They have been catching up after a long period of paying low dividends, but with Japan’s ageing population living off its savings, investors want income and dividends are what is likely to tempt them back into the stock market.
Right now, deposit rates in Japan are just 0.9%, below the rate of inflation (about 1%) and half the average dividend level of the stock market. That is an incentive for investors to buy shares, but individual Japanese investors are conservative and they are only gradually shifting some of the vast sums held in deposits into the stock market.
Slow and steady
Economic growth in Japan is low at about 1.5% but it is also stable, with most economists predicting that the country will be less affected by the credit crunch than the UK, US or Europe. Its banks are robust and its exporters are doing well. Toyota currently holds only about a week’s inventory of the Prius, which is selling like hot cakes in the US. It and Honda continue to increase their share of the US car market thanks to the popularity of their petrol-electric hybrids, and new models due next year will probably accelerate that process.
Standard Life Investments reckons the payback period for those hybrids is under three years, making them a slam-dunk choice for anyone who has enough money to buy one. Farm machinery exports are benefiting from high food prices, and infrastructure projects in China and India need Japanese industrial equipment.
Despite the stable to mildly positive outlook, Japanese shares have fallen back to 2005 levels amid the recent downturn in world markets. JP Morgan has as a result turned positive on the market. Other managers are keeping their heads down, because they had got optimistic earlier and results have been, to say the least, disappointing.
Performance of selected Japan funds |
Fund | Investment return* |
| 6 months | 1 year | 3 years | 5 years |
AXA Framlington Japan | -8.7% | -21.6% | -7.5% | +84.6% |
Fidelity Japan Spec Sits | -0.7% | -18.3% | -28.6% | +8.8% |
Invesco Perpetual Japan | -9.4% | -9.4% | +0.9% | +21.2% |
JPM Japan | -15.8% | -28.2% | -30.1% | -11.9% |
Jupiter Japan Income | -5.4% | -12.3% | NA | NA |
Legg Mason Japan | -24.1% | -34.6% | -68.5% | -50.6% |
* Including reinvested net income. Data to 22/7/08. Source: Financial Express. |
Many funds have done worse than the stock market averages, mainly because they have invested in smaller companies whose shares have continued to plunge. Large, blue-chip, ‘defensive’ shares have done best and the only manager to have loaded up totally in this area is Paul Chesson of Invesco Perpetual.
Most other managers have been switching from large to smaller companies, since they regard them as ludicrously cheap and believe that when the market turns they will make stonking profits. David Mitchinson at JP Morgan has compounded the felony by having a big holding in technology stocks, which have tanked even more brutally.
JP Morgan Japan has half its money in smaller companies while Legg Mason Japan has over 80% in this sector. With his truly disastrous investment record over the past five years, Legg Mason’s Hideo Shiozumi can only pray the market does turn before has to commit hara-kiri.
None of these managers look like geniuses now. This has been a long, horrible bear market in Japan with false dawns leading to repeated declines. But by most measures of value, Japanese shares are now somewhere between cheap and ludicrously cheap. And I will not be surprised to see Japanese funds among the top performing investments over the next few years.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
