Letter: Sun rises for Japanese stockpickers as yen fades

According to Leo Lewis (The Big Read, May 19) the Japanese stock market may be enjoying an annus mirabilis, which, as a very retired Japan strategist, is rather late for me, but I can at least observe from the sidelines and wonder, along with Lewis, whether the market has really lifted the iron coffin lid and broken out into a brighter future.

Lewis offers various explanations for why Japan is now swaggering rather than staggering, citing the usual suspects — shareholder activism, corporate governance, even dear old Warren Buffett. He ignores, however, the most obvious.

Since 2005, the Topix index has marched in lockstep with the currency — it has shown a close inverse relationship with the yen/$ rate which is, as far as I know, unmatched among the world’s equity markets. The simplest explanation for why the Topix has, improbably, broken through 2,000 is that the yen has, equally improbably, weakened beyond 130 to the dollar.

I would be more convinced by the market’s ascent if it were taking place at a time of yen strength.

According to Lewis, the market has been driven by buying from passive rather than active funds. This is a pity since Japan’s hidden secret is that it is a happy playground for stockpickers — it has always been a haven for the alpha rather than beta generation. No other market save the US offers such a broad range of investible equities, which is being constantly replenished by a steady stream of IPOs. Many of these companies may be relatively small or illiquid, but it is much easier to trade in small Japanese companies than, for example, their British equivalents. And, according to much academic research, Japan is the market where a systematic programme of stock selection most clearly delivers outperformance. So what’s not to like?

Jonathan Allum
Former Japan Strategist at SMBC Nikko
Amersham, Buckinghamshire, UK