This is basically the discussion on everything Japan that I have recently learned, that either does not really fit in anywhere else in my Golden Week writing, or features later but requires some introduction on the part of the reader.
First of all, I would like to present a huge thanks to Lazard Japan Asset Management K.K. for allowing me some time to talk to you and get better insights into how the economy looks from the inside. I will start with what I learned here:
Lessons from Lazard.
Pretty much no one wants to own property or housing. Renting is the only way to go, or borrowing as much as possible to finance the purchase so at least someone knocks on your door when (not if) the losses become unacceptable. Property prices have been going down for more than 20 years now, and never really even making an attempt at recovering or as much as turning north. This might change soon, although, as the following grim math explains, it might be too late. The people that remember what a fundamentally sound investment in property is, are about to stop investing altogether. Say you’re essentially only able to invest after 25 with a job paying off your expenses and this being the period where you have a rough idea what your spending patterns will be until you start having a family. Say that saving up enough to buy your own home normally takes about 5 years if you’re lucky. 30 years old, and you’re starting to think about whether investing in a home is a good idea. Now, remember that the bubble period was a pretty long scramble where one A) traded property with full knowledge of how bad it could bite and got out fast once the market got sour, or B) got badly burned in the process. of chasing the dragon and now have a huge housing loss on the family books. Still, the bubble expanded for a while before the pop. Say that the bubble started in earnest in 1986 with prices outrunning fundamentals. That’s 26 years ago. 30 + 26 = 56.
We’re optimistic here, and not assuming the 35-44 age cohort is the main period of real estate buying. Bubble times ca. 1985 and all. Now, it’s fine, right, nine years to get the market turning, right? Sorry, pension can start at 60 in Japan. it’s a bit of a hodgepodge of directives between getting companies to hold workers longer and actual laws, but count on 60 being it for the time being. That’s 4 years left in the last Japanese investor generation that even remembers what buying a house for long term property appreciation is. (Read the same sentence again, and feel free to highlight any random selection of words for emphasis.) Do you think they see any reason for investing in the four years they have left until starting to draw pensions? (Repeat procedure.)
To me this is shocking, but sadly puts the damage that two lost decades really does into some sort of perspective.
From the ashes into the fire? Hopefully not, even though equities are trading at extreme lows in nominal terms. Now, if you read Bloomberg, or pretty much any normal basic assessment by a stock analyst, things look pretty grim if you’re looking at 24 P/E for an index, as is the case for the Nikkei 225 at the moment. 5 000 before 25 000, much less 50 000, clear as day, right?
Yeah, if the Nikkei 225 wasn’t trading at a third of book. (You know the drill.) I’m not saying we should get something like IT valuations back, and Japanese companies have a lot of its value stored in hard assets, so the ability to use intangibles and brand value to blow up the P part of the P/B equation isn’t exactly there either. Japanese companies also do carry a large cash hoard, which isn’t too indicative of the willingness to employ cash for growth. DCF isn’t exactly in a position where you often need to consider Gordon Growth or any of its adjustments, for that matter. I know more PE firms than can be counted have cut their teeth to the bone trying to make money here, but 1/3 P/B? Sounds like it’s worth spending double that to buy out the nuisances that stand in your way and make some money, in the worst case you send it to bankruptcy and get 50% ROI.
It also shows that (while not a “generational buy”) imagine what all the momentum chasers globally would do if the yen fell back (say, towards 100 to the US$?) and allowed the P/E ratios to look more attractive and earnings to actually percolate throughout the economy. Think the current US indices rally is strange? Imagine that times five…
This inspires me to start checking on the currency leverage of the Nikkei 225. Should be fairly easy to get a correlation check, although for a slightly less immediate effects I suspect a formula like Average of corporate (Operational Leverage * Financial Leverage * %Exports) to get me a fairly good idea of what we’re looking at here. Yes, I still need to adjust for elasticity of price and some other detailed economics, but no point discussing that yet…
The main reason that I overheard for these low book values when I was trying to reattach my dropped jaw was general lack of liquidity. I’ll get back to this in a later piece, but it seems reasonable given the investment climate and the preference for JGB’s or proper cash to stash as much as you can in other areas than either housing or equities. the international impression of Japan as “the place where profits go to die” isn’t helping much either. My general thesis for later is that the best way to get asset price reflation is through sentiment and fundamentals (duh) where I see sentiment mostly as composed by liquidity and excess domestic capital. I see the fundamentals as good enough, and then the main factor with this thesis would be to try to put liquidity in context with excess domestic capital. More thinking about this later, but I at least hope you can follow my thinking here.
And that’s it from Lazard. There are other tidbits I was able to gather, but the previous points where the things that generally stood out to me and warrant mentioning on my blog for further reference. I will come back to this later in more detail, especially the liquidity point when I have structured my thoughts on the rest of the asset reflation equation. In the mean time, top this appetizer plate off with a few other fun tidbits I caught while spending some quality time in the Land of the Rising Sun:
The Cheap List – things I found strangely cheap:
- Hotel rooms. Hey, I can book last minute hotels in Osaka for equivalent prices to Taipei? Wha…
- Alcohol and partying. US$1.50/cl of hard liquor for your club/bar drinks if you look around? Hey, it’s 3x that in Hong Kong! Free entries to clubs? Wow!
- Shinkansen travel. Yes, that’s compared to the highway toll which is at least 65% of the bullet train ticket. It will still chew your wallet out if you ever sit down on one of those trains.
- Luxury goods. I got an Armani Ginza private show, and even with the ridiculous currency, it’s a marginally cheaper than Hong Kong! Watches, for example, HK$3 100 vs JPY 33 000. (Current exchange rates pretty much match the prices since the yen has strengthened lately) I don’t have the exact comparison with other brands, mostly because I don’t frequent them as much, and yes, the sales tax is lower in Japan (compensated for by the 40% corporate tax) but imagine paying off someone at least 400-500 000 yen a month to stand around and sell these things!
Briefly analyzing all these factors, one comes to the inevitable conclusion: why on earth are you not dragging Chinese shoppers over to Japan in droves? Give them their tacky bottle of baijiu at a place with a table, let them pour it themselves and just keep someone on staff to make sure there’s enough bottles around. Whiskey works too. Why are there more sales people than Chinese tourists at Armani Ginza in rush hour? Take a leaf from Taiwan and buss them around like lined up duckings in perpetual pursuit of stupid sign if you have to!
And what could possibly have possessed you not to make this the gambling paradise of Asia? You know luxury and service, and all the extra stuff outside of that (alcohol, hotel rooms) you can provide for cheap, allowing someone to enter and get caught in the dream, and that’s when you reel the margins in!
I honestly think foreign tourism in general is something that need work in Japan, although seeing Hong Kong and Macau, one wonders if those aren’t the best places to start the process.
The Dear List – Things that will make you lose respect for money:
- Anyone’s time. Anything that takes more than five seconds to do is expensive. Want a bartender to shake your drink well and strain it over ice cubes that are different from the ones used to chill the glass? JPY 2-3 000, thank you very much. Table service restaurants? Don’t even ask…
- Mostly because of the above, but food does make you feel like you’re eating money, and not in a good way. Spending less than 800 yen per meal is not recommended as a tourist, and the times you cut under 1K are few and far between. You can get something for maybe JPY 400, but I tell you, don’t go looking for it on an empty stomach…
- Internet access. Cafe’s are roughly JPY 500/hour, not very many of the hotels sport wifi (yeah, trust me on this…) and using the business centres is out of the question. The cafe’s make up for it by giving unlimited drinks, cheap junk food and great seats, but… seriously?
- Transport. Budget buses Tokyo Osaka was JPY 6 000, Shinkansen is 14 000 the same distance (one way, all of it) and taxis are legendarily expensive. Shinjuku – Shibuya on cab? A cool 6 000 yen, thank you. See point 1 on this list for the cab fare explanation.
- Visiting tourist spots. Okok, I get it, they need maintenance, but honestly, dropping 500 yen for snapping a few photos of a pagoda adds up pretty fast!
I hope that tides you over for a while, and come back in the coming days for more detailed analysis of specific topics and discussions of them!