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Time to Buy Japan?

Post-bubble Japan has proven a terrible investment. So far, at least...

MOST INVESTORS have given up on Japan, writes Martin Hutchinson at Money Morning.

Faced with Japan's aging population and huge public debt burden, the consensus view is that Japan cannot enjoy that vigorous economic growth it saw during the mid-to-late 20th century.

Last March's earthquake and tsunami worked to reinforce this opinion. Yet the tragic episode of early 2011 did have another side. It showed the resilience and discipline of Japanese society. There was almost no looting, for example.

More recent economic data also suggest that the Japanese economy is not dead. First quarter Japanese gross domestic product (GDP) came in at an annual growth rate of 4.1% – far higher than the United States, Canada, Australia, or anywhere in the Eurozone.

Given that Japan has been in perpetual near-recession for 21 years, with no surges of productivity like the US enjoyed in the late 1990s, it's really not a bad performance.

You can also see Japan's true strength from its exchange rate, which is currently ¥79 to the Dollar, up from around ¥120 five years ago. That makes visiting Tokyo very expensive. But that strong exchange rate also signals a highly competitive economy.

It's notable that observers in the United States, a country which habitually runs payment deficits of half-a-trillion Dollars and more each year, sneer at the economies of Japan and Germany, which are almost always in surplus.

Before 1995, I lived in another economy that was similar. Britain ran deficits much like the US does. So believe me when I tell you, deficits are not exactly a sign of superior economic health.

The reality is that Japan and Germany produce goods and services which are highly competitive to importers in both advanced and in emerging-market economies. Conversely, US exports are not as competitive except in a few sectors.

Even so, the Japanese stock market is still trading at less than a third of its 1990 peak. That's no longer something to sneer at, however, since the S&P 500 is also trading well below its year-2000 peak.

Of course, it's all very well quoting the superior returns over the long term from equity investments. But the truth is, we have finite lifespans.

An investment in the U.S that loses money for 12 years and counting – or 22 years and counting in Japan – is not very attractive as a means of saving for retirement (unless you're 25).

The reality is that speculative bubbles – such as those in Japanese stocks and real estate in the 1980s and in US stocks in the 1990s or real estate in the 2000s – are enormously damaging. The after-effects can last for years, or even decades.

Truly Alan Greenspan, Ben Bernanke and their 1980s Japanese counterparts have a lot to answer for. These quasi-politicians at central banks should not be allowed to play games with the money supply. Rather, they ought to adopt an automatic system such as a Gold Standard.

Nevertheless, while the tunnel may be a long one, it is not an infinite one. Today in Japan there are signs we may be emerging from the other end.

Robust growth is the means by which both Japan and eventually the US will emerge, which will reduce the excessive debt levels in the system and allow equity and other asset values to start increasing again.

Naturally, the politicians have to stop running huge deficits in order for this to happen, but in Japan this may finally be happening, with the government proposing to double the consumption tax to 10% in two stages by 2015.

Since Japan's export sector risks being hampered by its high exchange rate, the best Japanese investment would focus on the smaller companies. Such companies benefit from domestic growth and are themselves suppliers to the export giants.

Alternatively, you should consider investing in the Japanese financial sector, which has major growth opportunities in Asia and has avoided many of the problems of the 2008 meltdown.

After a long downturn, Japan is poised to rebound. The conventional wisdom, as is often the case, is wrong.

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Now a contributing editor to both the Money Map Report and Money Morning, the much-respected free daily advisory service, Martin Hutchinson is an investment banker with more than 25 years’ experience. A graduate of Cambridge and Harvard universities, he moved from working on Wall Street and in the City, as well as in Spain and South Korea, to helping the governments of Bulgaria, Croatia and Macedonia establish their Treasury bond markets in the late '90s. Business and Economics Editor at United Press International from 2000-4, and a BreakingViews editor since 2006, Hutchinson is also author of the closely-followed Bear's Lair column at the Prudent Bear website.

See full archive of Martin Hutchinson.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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