Japan is not a Bargain

US Listed Japan ETF’s Not as Cheap as You Think

Investing in Japan has been on my mind the past week, but so has the crowd. What this means is that American investors have not been fleeing.

A quick way to judge this is to simply compare the drop of the Tokyo Stock Exchange (TSE) Index compared to the ETF’s that trade on the US exchange.

The first three days following the disaster, the TSE fell 22%. Compare this to the iShares MSCI Japan Index (EWJ) which fell around 12%. Small cap Japanese ETF’s JSC, SCJ and DFJ fell roughly 14% a piece.

This is a big disparity and shows that the crowd is very willing to pick up shares in Japan.

Despite the 14% fall, the current prices really only go back to Dec 2010 levels which is not cheap to begin with. Add the currency risk into current prices, and Japan is not the bargain you think.

Are Japanese Stocks Cheap for US Investors?

As a quick example, assume that Panasonic (PC), at the 52 week high price of $16, is fairly valued. The point of this exercise will be to see whether current prices reflect value for US investors. I am not able to purchase stocks off the TSE and my assumption is that most people cannot as well.

Geoff Gannon made a great point about currency risk and how the overvalued Yen affects an investment.


Currently, 1 USD will get you 80 Yen but by looking at the conversion rate over the past 2 years, it looks like the appropriate rate should be 1 USD for 95 Yen.

Geoff took the normal rate to be 1 USD : 109 Yen, so my value is even more conservative.

Using the 95 Yen value, the Yen at the moment is 19% overvalued. In other words, Japanese stocks could lose 15% of its value simply based on currency conversion alone.

Apply this 15% drop to Panasonic and the theoretical fair value comes out to $13.60. At the current price of $12, the potential upside for Panasonic is 13%. Not the best opportunity you may have been thinking about.

If you include a 25% margin of safety, since EVERY investment requires a margin of safety, then the buy price is $10 which Panasonic does not satisfy.

Japan has Historically been Cheap

You could argue that the original fair value of $16 for Panasonic is much to low to begin with. If I perform the above calculation in reverse, the fair value of Panasonic would have to be $20 for the current price to offer value.

The problem however, is that Japan has always been cheap. If you believe that Japan is cheap now, then you should have believed that Japan was cheap before the earthquake.

If  you did not have any positions in Japan before the disaster, it just means that you had better places to put your money. Put another way, it wasn’t that cheap.

Consider that when deciding whether your next Japanese stock is a value trap or opportunity of a lifetime.

Don’t let me discourage you though. I am looking through a list of Japanese ADR stocks hoping to find a no brainer.

Since I can not purchase stocks on the TSE, my best bet is to find an ADR. The universe is much smaller, but there are still plenty of ideas and you have a much better chance of finding a diamond with individual stocks rather than the Japanese ETF’s or closed end funds such as JOF.

Japanese ADR’s to Study

This site provides an outdated list of Japanese ADR’s and I have removed the stocks that no longer trade in the US.

Download the Japanese ADR stocks for excel. It has over 70 stocks you can look through. Most of them have zero volume on the OTC but it will be a good exercise to go through them.

For more Japan investing thoughts, here are some additional links that may interest you.

Disclosure: None

  • Just a few notes:

    The reason the US listed ETFs didn’t fall as much is due to the Yen appreciation, if you look at the difference 22% and 14% almost the entire difference is in the Yen fluctuation. As Geoff Gannon mentions the Yen is potentially overvalued, so an easy way if you’re going in to buy there is to hedge your exposure, there are USDYEN ETFs that you could either sell short, or setup a option strategy to reduce the exposure.

    I have purchased a few Japan ETF’s in the past few days, one hedged, one unhedged. I also looked at purchasing a TOPIX ETF on the Tokyo exchange directly a few nights ago, but opted for a hedged Japan ETF stateside due to the Yen appreciation factor.

    I find value investors running the other direction from Japan fascinating. Japan has a slew of net-net’s that are profitable but earn a pathetic ROE. Since these companies are overseas most US value investors seem to shy away whereas if these were American companies, no debt, net-net profitable they would be snapped up without discrimination. I’ve been investing in Japanese stocks for the last few years.

    As an aside, you mention not being able to transact directly in Japan. I remember in a previous post you use Fidelity as your broker, I do as well, they have an international trading option available if you call them. The minimum on it according to the site is $1m but if you have a six figure account they will make an exception. I’ve found a lot more opportunities for cheap stocks internationally opened up once I was able to transact directly, almost all of the companies are smaller and don’t trade at all on US exchanges or OTC. I’ve also found most companies print their annual reports in English as well. As an American investor you need to be aware of the GAAP IFRS differences, but honestly I much prefer IFRS to GAAP anyways, much cleaner simpler statements. Fidelity can settle in USD or the local currency, I prefer the local currency because I believe in diversification, not just of stocks but of money as well, but YMMV.

  • I dont see value investors running the other direction, but it’s just that Japan itself has been a value trap and nothing indicates that will change. In fact, this disaster could actually further emphasize it. Companies will want to build up even more cash, return none of it, continue achieving their paltry ROE’s, ignore shareholders and there are no activists or catalysts to unlock any value.

    The way I see it, waiting for a 20% in the US market from today’s prices will yield better value.

    Thanks for the tip on Fidelity. Didn’t realize they could waive the fees. If I can start buying stocks in local currencies, that would be a huge plus.
    I hope the average investor can find ways to do it as well.

  • Ryan

    Have you looked at any Uranium stocks…(Cameco, Uranium One, Shaw Group…etc)

    I have been thinking of buying a basket of such stocks.
    Although, this particular sector is out of my circle of confidence, so it would make up less than say 2% of my portfolio.

  • That was along the lines of something I was thinking as well. But there are too many to choose from and I’m not certain which one is which. All I know is that URRE is a popular stock.

    I was looking into GVP. Builds simulators for Nuclear plants and has been hammered recently. Not quite confident in the investment, although the company is very interesting and easy to understand.

  • stormam

    USU is an interesting uranium stock as one of the few Low Enriched Uranium (LEU) producers in the world. It has had government contracts and deals with Russia on the nuclear disarmaments but if nuclear ever took off it would have a lot of lvg to that. Not much, if any, valuation support so it becomes a thematic investment.

    As for Japan, Nate says ‘if these were American companies, no debt, net-net profitable they would be snapped up without discrimination.’ That’s right, these are American companies. The rules are different in Japan => valuation and investing must be different. The Japanese don’t accept failure the way we do. As such, low return businesses survive but have no competitive edge or sustainable earnings power. What could that possibly be worth? An American company would file and everyone else would get stronger. Americans would innovate and destroy the weak company, run it out and take the assets on the cheap.

    Structurally, the Japanese economy is also different. Japanese debt has been been funded by Japanese savings for decades as trader after trader is blown up trying to short the nation’s debt. But the country is getting older, debt keeps going up and savings is no longer covering new debt. Further, the tragedy in Japan will force people to sell investment holdings to focus on re-building. Insurance will cover some costs, but not all. Of the estimates for +$300 billion in damage done, if $150 billion is funded by Japanese savings, there is a large hit to savings. Anything to sap demand for Japanese debt and increase rates will effectively destroy the government given the debt loads and 0 interest rates. When? No idea. When it breaks, a lot of companies will go under, the Japaneses will fix the problems and emerge better and stronger. I think it will be an ugly transition and the end to their decades long bear-market will be heralded by a catastrophe big enough to change the way they do business. Anyone with no competitive advantage is unlikely to survive without building a massive balance sheet, which is impossible with no real ROE. An earthquake doesn’t seem a likely catalyst unless it forces the debt situation to spiral out of hand.
    This is probably too dooms-dayish, but Japan is structurally broken for now in my view.

  • Hate to admit it for sake of sounding insensitive, but I’m in agreement here. What investors do not understand and take into consideration is the difference in mentality and culture of the Eastern and Western world.

  • Zehua

    I thought Tokyo Electric might be a classic Three Mile Island turnaround, but now given the scale of the tragedy, I think the equity holders are probably going to be wiped out.
    The Japanese insurance companies might be interesting too as they will have a terrible underwriting year for sure.

  • I have aweb site where I give advise on penny stocks. I have many years of experience with these type of stocks. I would like to comment about japan. as a astute value investor I would have to disagree with the notion that it is not a good time to buy japanese stocks’ theirs many japanese automotive stocks that are really attractive at current prices any many japanese automotive companies do most of their business outside of japan.

Ready to try Old School Value?