Japanese stocks have been long-term laggards. The Nikkei 225 Index peaked at nearly 39,000 in 1989, after having increased sixfold during the 1980s. Since then, the broad Japanese market has had more downs than ups, and the Nikkei 225 now trades around 9,400, for a drop of more than 80 percent in 22 years.
Now, unsurprisingly, Japanese stocks are cheap. Morningstar reports that Japanese stock funds trade at only 1.22 times book value per share, on average, and 6.38 times cash flow per share. By comparison, those ratios are much higher for the average domestic stock fund (2.26 and 7.73) and for the average international stock fund (1.96 and 8.24). The lower the ratio, the less expensive the stock.
Besides being inexpensive, are there other factors making Japanese stocks appealing now? The government has promised generous amounts of funding to stimulate rebuilding after recent disasters there. Corporate profits might swell as a result. Moreover, Japanese exporters stand to benefit from global growth, especially growth in the nearby emerging markets of Asia.
There are negatives, too, but they may be priced into the market now, after more than two decades of losses. Investors shouldn’t overload on Japan but a small allocation to Japanese stocks or the funds that hold them may be an attractive speculation now.
