Rather than dwell on the reasons for Japan’s fall from grace in the 1990s, investors should focus on how Japan has reacted to it. In the more recent past, we have seen painful but necessary change take place that is finally redeeming Japan in the eyes of the investment community.The cosy arrangement of cross-shareholdings that characterised the boom has been effectively unwound. Merrill Lynch estimates that cross-shareholdings and stable shareholdings amounted to about 50 per cent of total market cap in the 1980s but will have dwindled to under 20 per cent by next year. Companies have reduced gearing, the banking industry has been recapitalised and deflation is finally ending. Profits and margins are now at record levels, by some distance, and are expected to keep rising. Net cash levels are also at record highs. Japan is more than just an export-led story, as domestic demand is also improving, with employment levels rising after seven years of falls. Household earnings are beginning to improve and land prices have stabilised. Yet valuation multiples for Japanese equities are still low and have been falling. In terms of price/earnings, Japan looks a little cheaper than the US and, in terms of price/book, it is substantially cheaper. For an equity investor, Japan looks a good bet. So why income when, on the face of it, growth might be a better bet? First, there are a few fallacies which need to be put straight. Japan is thought of as a low-yield market, which it clearly was in the 1990s. But if you look back to the post-war era, when Japan was the first of the so-called tiger economies, the dividend yield reached as high as 8.5 per cent, according to Credit Lyonnais. Though yields are unlikely to return anywhere near those levels, they are expected to rise as earnings and payout ratios increase. UBS’s estimate at the current market price is for a yield of 1.7 per cent in 2006, on a payout ratio of 30 per cent of earnings, rising to 2.7 per cent by 2008. Nor is it true that there is no dividend culture in Japan. Nomura recently raised over 200bn yen ($1.8bn) in a high-dividend Nippon fund. Japanese companies need to attract stable shareholders and pension funds need income. The corporate sector needs to charm shareholders for various reasons, the key one being that, in the new era, foreign and domestic predators, including vulture funds, are building stakes. At 24 per cent of total value, foreign ownership of Japanese equities has never been higher and Japanese companies no longer have the protection of cross-shareholdings. There are many examples of firms looking to woo share- holders and protect themselves from rivals. Toyota has started to raise its dividends and has been increasing stakes in its group companies to buf- fer it from unwanted bids. Pension funds need income because yield is hard to come by in Japan. Dividends are an attractive source of income because they offer the lure of growth and, not least, because the yield is higher than for 10-year government bonds. The yield on 10-year governments is about 1.3 per cent while mobile giant NTT DoCoMo has a prospective dividend yield of 2.2 per cent for the year to March 2006, rising above 3 per cent in 2007 at current prices. The incentive to pay divi- dends is there and Japanese firms are in a better position – and are increasingly willing – to pay them than at any point in the past 15 years. The combination of low valuations, strong domestic demand for income and the need to lure long-term shareholders suggest Japan and income should not be considered such strange bedfellows.
Mazars’ two brands – Mazars Financial Services and Russell Financial Services – are to be merged under the single brand of Mazars Financial Planning. The firm says it will expand its national IFA operation over the next 12 months and increase its total of registered individual numbers from 20 to more than 25 by the […]
Berkeley Alexander is cutting the cost of mortgage payment protection insurance for younger people in a new product offering a three-month payment waiver. Mortgage Lifeline introduces age-banding and an initial three-month payment holiday, reducing premiums for young policyholders. Berkeley Alexander claims that 85 per cent of people taking out an mortgage payment protection insurance policy […]
Afew years ago, I met a veteran of the Spanish civil war who knew a lot about the state second pension – then called the state earnings-related pension scheme.
Axa is recruiting new staff in London in a bid to beef-up its public relations operation. The firm is looking for three new members for its communications team, with two staff – a PR manager and executive assistant – sought for its general insurance arm in London as well as a corporate communications assistant to […]
When he was Chancellor of the Exchequer, George Osborne made several changes to the way in which income is taxed. Personal allowances were increased significantly above the rate of inflation; a starting rate band was introduced for savings income and, with effect from 6 April 2015, this was assessed at 0 per cent. In addition, […]
- Top trends
News and expert analysis straight to your inboxSign up
Latest from Money Marketing
A majority of independent financial advisers think there should be a single rate of tax relief according to this week’s Money Marketing poll. More than 120 advisers took part in the poll with 77 in favour of a single rate of tax relief, 39 against and six undecided. Yellowtail Financial planning managing director Dennis Hall […]
The FCA has issued a warning over ‘commoditised’ defined benefit pension transfers running the risk of unsuitable advice. In a letter sent to advisers holding pension transfer permissions, the regulator reminds planners that a “key area” of its focus is on pension transfers, and that it will later this year be contacting all firms to […]
Problems look set to arise for pension schemes operating relief at source