A few quick observations before jumping into markets and the economy:
Tokyo is a beautiful city—very clean and orderly for such a large city (the greater Tokyo area has more than 35 million people). I have visited several different areas in the city, and it is impossible not to be impressed. A quick cultural note—I lived for two years in New York City. During that time, I became accustomed to the “New York” mindset when crossing streets. New Yorkers do not wait for the “walk” sign or a green light, they simply “go” if they can cross before getting hit by a car. Not so in Tokyo. I had some funny looks when I simply crossed the street without a green light, despite no cars in sight. I learned quickly to wait patiently for the signal, even on an empty street! Even traffic and busy streets seem orderly. At some busy intersections, when the light turns red, they turn red in all directions. With the traffic stopped, pedestrians spill out into the street from all directions. This “scramble” is fun to watch. A moment of chaos quickly dissipates, and cars and people are both on their way. In Tokyo, everyone seems to know where they are going.
The people of Japan have been incredibly courteous and kind. I have been helped at every turn. Proper respect is integral to Japanese culture, and viewing it firsthand has been impressive. I only hope that I can be as quick to help visitors to the United States! A case in point—we visited Tsukiji Fish Market early Monday morning. It is the largest wholesale fish and seafood market in the world. The market is busiest before 9am, and it is only after the busy time that they allow the public to enter. During a jet-lagged, early morning walk through the area, I met one of the seafood buyers. He offered to take us in the market during the busy working hours. I have never seen anything like it. The energy was contagious, and it reminded me of what stock exchanges used to be before giving way to electronic trading. We were glad that our new friend intervened on our behalf when the security tried to escort us out!
The seafood is fantastic. As a sushi lover, I can’t get enough. Seafood is everywhere, and the dominant cuisine serves as a reminder of Japan’s status as an island nation. This geography has shaped its history. Its lack of natural resources has forced it to seek other competitive advantages. A lack of natural resources has also helped shape Japan’s geopolitical calculus over the last 150 years. Back to the seafood—I have never had better tuna nigiri and sashimi. Yesterday was a day of seafood—fishcakes, tuna (literally melt in your mouth), squid, scallops, and an array of sushi and nigiri. The food has been better than advertised.
It is easy to fall in love with the people, the culture, and the food of Japan. But what about Japanese financial markets?
It is highly appropriate that our Investment Trek begins in Japan. Japan’s equity markets are the second largest in the world after the United States. The S&P Global Broad Market Index currently has nearly a 9% allocation to Japanese equities. Japan’s current share of the global stock market capitalization is a far cry from its peak in the 1980’s, when it accounted for more than 40% of the global stock market in 1988! Japanese markets were the envy of the world during the latter half of the 1980s, hitting a peak of nearly 39,000 for the Nikkei Stock Average at the end of 1989. Spurred by accommodative monetary policy, Japanese equity markets inflated into a massive bubble.
The 1985 Plaza accord (global currency agreement) triggered a general decline in the value of the U.S. Dollar, with the Japanese Yen strengthening from 236 Yen/$ in September to 202 Yen/$ by December. The Bank of Japan confronted this Yen strengthening by cutting interest rates from 5% to 3% in 1986, leading to surges in equity and land prices. Later, the BOJ voiced concern about asset inflation, and suggested a desire to start tightening policy. This was dashed by the 1987 crash, and policy stayed accommodative. The Nikkei 225 had moved across 13,000 in 1985, and peaked near 39,000 at the end of 1989. The BOJ started to tighten in 1989, and it really became aggressive as rates moved to 6%. The market hit a low around 9,000 in 2009, but has since rebounded above 20,000.
After two decades of deflationary pressures, Japanese markets have become much more positive. One of our objectives during a stay in Japan is to gauge the justification and sustainability of this new found optimism for Japanese equities.
Special thanks to Brennan Staheli, Joe Dunbar, and the Lunt Capital team for their contributions to this report.