Jonathan Ruffer: my big bet in Japan

Japan is the biggest "sell" of any developed economy. It lacks raw materials, its land is predominately too mountainous to be productive, since the early 1990's successive governments have adopted a similar strategy to catalyse growth, to no avail (repeating the same policies to achieve a different outcome has never succeeded) and the culture is wholly unsuited to delivering the necessary behavioural change. But these points pale into insignificance compared to Japan's catastrophic demographic structure; their ageing population means that fewer and fewer workers are available to support the burgeoning pensioner population. In parallel, their legendarily higher savings ratio has collapsed (from 23% in the 1970's to c2.5% now as pensioners consume their savings) so they are increasingly reliant on foreign capital to service a horrific government debt burden. Sell, sell, sell. Sorry, go short Japan.

All true, Michael Johnson, but you miss out on one point.

Japan has some of the world's biggest international companies, and the geography and demographics of Japan has very little impact on them. On a pure valuation basis, some of these companies look extremely cheap, so for that reason many people believe Japanese equities are a good bet.

The Yen surely must weaken at some point, helping exporters. So I agree with Ruffer, Japanese equities are worth buying, but if you do so you need to choose a fund that hedges out currency risk.

Absolutely correct michael, the bonds especially are an obvious government weakness and in the currency.

But a weak currency would aid exporters and Japan represents maybe one of the best source nations for China. Japan spends more on R&D then any other country

Despite the best interference of government their companys could suceed and the price does not reflect their unique potential in the world. They are totally unpopular and undervalued

I am topping up my RICA holdings

It probably says more about the prospects for other markets that managers are turning to japan.

I am also a bit overweight in Japan stocks in my assets allocations (6-8% in place of 2-4%) so better the Japanese will do it right this time. All kept hegded back to Sterling off course.

I suppose that the big companies in Japan operate largely offshore even in the UK eg Pilkingtons. Buy the company not the Index.

Here's an issue regardng Japan which I haven't seen mentioned. If you google:

japan corporate tax

you can soon find that the rate is regarded as high (I've read 30%, and as high as USA which is higher than G7 or Asian average), and there are calls to reduce it.

That makes me wonder if Japanese companies might be tempted to under-declare profits, for instance by keeping profits overseas. If so there might be more benifit to shareholders than expected if the tax cut happens, or more value in companies than is obvious.

However I can't say how significant that might be as the subject soon becomes too dull to research.

Are there any funds with significant hedging against the yen or against Japanese government bonds?

I think the Artemis Strategic Assets fund had some kind of yen-short last time I looked, but I can't remember any details.

I've got a small spread-bet on Japanese interest rates going up, which can't lose much even if the rate goes to zero. Would be interested in any better hedging ideas.

I've read a tip somewhere which mentioned that as Chinese wages rise they will want to automate which should benefit some Japanese companies in that area.

I believe Phillip Gibbs @ JUPITER has also taken a big position on Japanese bonds?

The signal that has been missing for more than 20 years now is any indication that the Japanese are prepared to buy their own companies shares.

All that has happened for these many years is that suddenly a group of foreigners decide for all sorts of reasons that the market is undervalued; they then buy....the market goes up a bit...the Japanese keep sitting on their hands... there are no more foreigners left to buy...market goes down...Japanese agree that the foreigners are nuts...and everything goes to sleep again until, a while later another foreigner thinks he has discovered el dorado.

One day someone will be right, but the odds are long against that it will be you!

Ruffer has been bullish on Japan since as far back as I can remember! I guess that's their only bet that has consistently disappointed them. My problem with Japan is their culture. Companies are there to serve the society first (and then to make a profit if they can). Shareholders are treated as S***, which is why investor activism hasn't paid off despite all the talk of 'extracting value'. Japan is cheap, but it's cheap for a reason. Be speacially wary of domestic stocks...