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Steven Towns is an American value investor who has lived and worked in Japan for over a decade. He has often acted as an “activist” in Japanese listed companies and speaks fluent Japanese. He writes the “Uguisu Value Newsletter”, an investor letter focusing on Japanese value stocks in the micro and small cap segment.
THE JAPANESE STOCK MARKET. Japanese listed companies’ short names consist of numbers, unlike letters that are common in Europe and North America. Shares in the same sector start at the same figure. In 2012, 31% of the listed companies were followed by analysts and among the small companies, coverage was even more limited. Japan still uses minimum trading units. As a rule, shares are traded in the hundreds or thousands, depending on the share price.
EDINET IS JAPAN’S EDGAR. EDINET (Electronic Disclosure for investors’ NETwork) is the Japanese stock exchange’s database for filings and is available in both Japanese and English. Of the small companies’ reports, however, almost all are in Japanese.
CHRONICALLY LOW VALUATIONS SINCE THE CRASH OF THE 1990s. For a short period in 1990, the total market capitalization of the Japanese stock market was higher than the previously unthreatened number one, the United States. The total Japanese real estate market was at the top valued four times more than the US real estate market. In 1990, the bubble burst. In 2005, 15 years later, the prices of commercial properties and stock market indices were down 90% and 60% from the top, respectively. In 2019, the index is still down just over 40% since the peak in 1990. In 2012, when the book was written, the median P/B was about half in Japan compared to the western world markets. In 2019, the average P/B ratio on the Japanese stock exchange was 1.1, compared to 1.6 in the UK and 3.3 in the US.
LOW PROFITABILITY. Japanese companies have generally shown low return on equity in recent decades. Towns believes that this is not necessarily due to low profits but rather to inflated balance sheets. Many Japanese companies have an equity ratio of over 60% and excess capital that returns almost nothing. Another reason for the low profitability is that the companies greatly overinvested during the 2000s, which is a result of there being (too) plenty of capital. On average, a Japanese company spends 194% of its profit after tax on depreciation. The corresponding figure for American companies is 60%. The normalized figure for Japan before the financial crisis was 65%.
AN AGING POPULATION. Towns believes that Japan’s demographic problems are overestimated. The EU and China also have aging populations and population pyramids similar to Japan’s. In addition, Japan’s older part of the population is one of the healthiest in the world. Japan spends significantly less of GDP on health expenditure (11%)  than, for example, the United States (17%)  or the EU (10%) . Japan also has the option of admitting immigrants, something that in principle does not happen today.
AN INDEBTED CREDITOR NATION. In Japan, VAT is only 10% , which is low compared to other advanced economies. This gives the state a latent opportunity to increase tax revenues through small VAT increases to meet the costs of an aging population (at the time of writing, VAT was 5%). In addition, Japan is the world’s largest creditor nation. Taxes on corporate profits and labor are, however, relatively high and amounted to 31% and 56% respectively in 2019 (Sweden has 21% and 57%, respectively). As of 2019, the Japanese government debt amounted to 238% of GDP (highest in the world with Greece as second), but the debts are to its own residents and in the yen – so the government can “print money” if the debt burden becomes too heavy.
CHEAP BIG MACS. According to The Economist’s “Big Mac Index”, the Japanese yen is undervalued. A Big Mac cost $3.64 in July 2020, compared to $6.91 in Switzerland and $5.71 in the US. Of the advanced economies, Japan is at the bottom of the list.
A LOT OF CAPITAL ON THE SIDELINE. In 2011, the average Japanese, all in all, was good for about $150k. At the time of writing in 2012, only 4% of this capital was invested in the stock market (in 2018 that figure was 10%), and only 1% in the domestic market. Japanese investors have a preference for foreign markets, which is explained by the fact that their own market has been stagnant for almost 30 years. Should the Japanese regain interest in the domestic market, the potential for multiple expansion is good.