Lost in translation no more
Merryn Somerset-Webb says Japan is the new epicentre of cool, and its stock market is about to warm up again When I lived in Japan in the 1990s, almost no one came to visit me. My two closest friends were persuaded to come for a week's holiday and my father passed by once on business. That was it, in six years. When my father did come he refused to leave the New Otani Hotel for the entire three days he was in Tokyo, because he found going out too strange. Inside was Western food, CNN, and people who spoke a sort of English. Outside was another planet. My friends had no interest in Japan either, but for a different reason: it was too boring.
The endlessly hyped Japanese postwar 'economic miracle' and its subsequent demise had left them thinking of the place as no more than a vast, sinister industrial estate full of uniformed workers doing group callisthenics. This wasn't entirely unfair. When I first arrived in Japan to live in the southern industrial city of Nagoya, I asked for sightseeing advice and was told the nearby Toyota factory was a must-see. I went and it wasn't, but it was nowhere near as bad as the knife and fork museum in Niigata or the noodle museum in Yokohama. These managed to be not just boring but weird too.
The same was true of the Japanese stock market. It was weird because it did not seem to correlate to the rest of the world: while Western markets were gearing up for the greatest bull market of all time, Japan's skulked into the late 1990s 50 per cent lower than it started the decade. And it was boring because the fundamental problems underlying its decline — debt, deflation, collapsing property — never seemed to go away.
Every couple of years the Nikkei index would stage a splendid rally (up 53 per cent in 19%), then just as dramatically collapse again (down 34 per cent in 1997). And so on until the investment community finally lost interest: convinced that Japan's economic problems were never going away, they threw in the towel and sold the Nikkei down to a 20-year low.
How times change. If I lived in Tokyo now, I would be plagued by phone calls from distant acquaintances desperate to find a bed in the world's coolest city.
Japan isn't boring anymore: it has become the epicentre of global pop culture.
Take manga, the comic-book stories of sex and superheroes which were practically unknown in the West a decade ago. Today the manga-derived computer game Pokemon is as much a part of most Western childhoods as Winnie the Pooh, and Courtney Love has co-written her own series of manga-style books for adults. Last year around $100m worth of manga were sold in the US — around 25 per cent of all US comic book sales.
Then there is Japanese music. Just back from a radio tour of the US is the singer Hikaru, who sold more than a million albums there in three weeks. And fashion: Japan may long have been home to international brands such as Issey Miyake, but it's the less well-known names that everyone is suddenly after. Shoppers queue for hours just to get into the London store of a notvery-special Japanese T-shirt brand called Bathing Ape. Even Seiko watches, long regarded as the poor man's Rolex, are now almost cool. Bill Murray and Scarlett Johansson may have affected finding Tokyo downright weird in Lost in Translation, but the real-life fashion crowd can't get enough of the place, and all of a sudden neither can the fund managers who fell so utterly out of love with Japan only a few years ago.
So how did the world's geekiest country suddenly become cool Japania, and its most reviled market turn into the brokers' darling? The answer to both questions lies in Japan's lost decade, the 1990s. Eventually, recession hurt enough to force social and economic change. Once upon a time the brightest and best moved straight from university into Japan's blue-chip householdname companies, where they worked their way up the ranks. It was dull and restrictive — you were paid by age, not by achievement, and for the first several years you spent your time photocopying and bowing — but it guaranteed you a job for life. The long downturn dismantled this social contract; far from feeling obliged to pay you for ever, your company could now edge you out at any time in the name of restructuring.
That didn't seem such a good deal, so Japan's young stopped applying for the dwindling number of jobs on offer and rebelled. In the mid-1990s that meant dyeing their hair yellow and pink and dancing in Tokyo's Yoyogi Park on Sunday afternoons. But later it meant being creatively entrepreneurial. Just as the world's fund managers were booking one-way tickets out of Tokyo, the brightest and best Japanese were starting the new companies that would kick their economy out of its slump.
Today most of the interesting products that come out of Japan are created by small firms and licensed to big ones. So successful have Japan's entrepreneurs been that more than 100 new companies were launched on the Tokyo stock market last year. In Germany, only one was. Recession has forced change in Japan's big companies too. They have had to streamline their businesses. Today, profits are at record levels. And the really interesting thing is that this restructuring has happened in a deflationary environment, when sales have been essentially flat. This means the corporate sector now has enormous 'operating leverage': if prices start to rise, profits will soar. So the most important question for the Japanese market today is whether deflation is dead.
The IMF certainly thinks so. It is forecasting an end to deflation by the end of the year. Anecdotal evidence suggests that it could, on this rare occasion, be right. Consider the case of the country's famous 100-yen shops, where everything on sale costs 100 yen (about 50 pence). These made fantastic sense in deflationary days, but as prices rise the business model doesn't look so good. Good news then that the market leader Daiso Industries is to shut down more than 100 shops and its competitor Can Do is shutting another 30. Both clearly think deflation is a thing of the past. So does much of the financial community: expatriates working for Morgan Stanley have been snapping up buy-to-let apartments just down from the new Prada shop in Omotesando (Tokyo's Bond Street), for example. They wouldn't be doing that if they did not think prices had bottomed.
There's plenty of other good news too: the OECD is forecasting stronger GDP growth for Japan than the US this year; most encouragingly, consumer confidence is at its highest since 1991. And one more thing has changed in Japan: its equity markets look cheap. Back in the early 1990s, price-to-earning ratios of 50 times were considered perfectly acceptable in Japan, on the basis that its companies were somehow 'better' than their Western competitors. But today the average P/E ratio hovers around 16 times, about the same as the US market. The difference is that today's Japanese companies — particularly the smaller ones geared to domestic recovery — may actually be better than American ones, which have been issuing rising numbers of profit warnings and face a risk of deflation to come. I know where I'd rather invest over the long term — and where I'd rather go on holiday.
Menyn Somerset-Webb is editor of MoneyWeek.
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