I really like Japan, a country where I started investing in the mid-1980s, but which I have barely touched over the past two decades.

A big reason for my attraction is that Japan is so startlingly different from the US that almost every initial instinct I have for judging intentions and performance turns out to be wrong. Japanese cities are beautiful (the hinterlands not so much). The food is excellent, if expensive. And after decades of economic stagnation and currency devaluation, Japan has begun to embrace its new role as a tourist destination.

an aside: measuring performance

In my experience, there are very few flat-out rules in equity investing. The FOR I’ve found over the years to be perhaps the most useful is that anyone who uses Dow indices as benchmarks is clueless (the Dow indices use per share stock price rather than market capitalization to establish weightings and produce wacky results because of this).

Dow indices exist in only two places I know of, the US and Japan.

recent interest in Japanese stocks

I’ve been struck by how often I’ve been hearing/reading members of the US financial press recently touting Japanese stocks. Representatives of asset management companies are saying the same thing in media interviews–superior performance year-to-date and more outperformance vs. US stocks to come.

This is weird, to my mind, given the poor economic backdrop in Japan: aging population; decades of economic stagnation; refusal to accept women as workers; the high level of government debt, and the resulting collapse of the yen; the brain drain of scientists to China; and a samurai-culture resistance to change by Japan’s largest companies.

So I looked.

Year-to-date, the Nikkei 225 is up by around 30%–and is (only now) approaching its 1990 all-time high. Topix, the S&P equivalent, is ahead by about 22%. That’s in yen, a currency that has fallen by about 8% vs. the US$ so far in 2023. In dollars, which is what matters to a US investor, the Nikkei is about +22% and Topix +15%. This compares with the S&P ahead by 16% and NASDAQ up by about a third. For what it’s worth, the US Dow industrials are +3.3%.

(Another aside: How could the Nikkei only now be approaching breakeven for the past third of a century? I really don’t know what has happened to the index structure over the past two decades (maybe nothing, but nothing good apparently). I do know that, frustrated with the relative weakness of the then-tech-poor Nikkei, Japan Inc. loaded the index up with local tech stocks just as the internet bubble was bursting in late 2000. That set the index up for close to a 60% drop in value over the following two years.)

Anyway, I don’t see the fabulous performance I’ve been hearing/reading about. The only way I can make the media story square with the numbers is to use an unrepresentative index and ignore currency losses.

there is an attractive Japan story, though

I think it’s in smaller non-establishment firms. I’m just starting to look, but what I’d consider bit plusses are: no association with traditional industrial conglomerates, low capital intensity, young top management, a woman as CEO.