In this commentary, we provide the finding of research performed by the Lazard Japanese Equity team, which makes the case for investing in the Japanese equity market.
Anyone involved in the stock market should understand the power of leverage on returns. Too little credit creation makes for subpar economic growth. Too much leverage often leads to over-inflated asset prices, which in turn eventually lead to too little credit creation. Therefore, as investors, it is very important to understand where an economy is in its longer-term credit cycle.
Japan’s longer-term credit cycle peaked in 1990, and appears to have bottomed in 2003, with the end of the country’s massive bad debt problem. The United States, which enjoyed a historic bull market in the 1980s, most likely saw its longer-term credit cycle peak in 2006, in tandem with the country’s housing prices.
Taking these factors into account, Japan is at least a decade ahead of the United States from a credit-cycle perspective. What investment insights can we learn from Japan’s “lost decade,” and what are the implications for the United States?
In summary, if the Japan experience is the “New Normal,” we can likely expect the following in the United States:
- The private sector will deleverage, and the public sector (government) will leverage.
- Returns will be below historical averages for the foreseeable future, and bonds will most likely perform better than equities.
- A new structural bull market cannot begin until the majority of problem assets have been written off.
Against this backdrop, there is a case supporting the view that Japan, whose longer-term credit cycle has already bottomed, may offer an attractive investment opportunity for investors.
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In this commentary, we provide the finding of research performed by the Lazard Japanese Equity team, which makes the case for investing in the Japanese equity market.
Anyone involved in the stock market should understand the power of leverage on returns. Too little credit creation makes for subpar economic growth. Too much leverage often leads to over-inflated asset prices, which in turn eventually lead to too little credit creation. Therefore, as investors, it is very important to understand where an economy is in its longer-term credit cycle.
Japan’s longer-term credit cycle peaked in 1990, and appears to have bottomed in 2003, with the end of the country’s massive bad debt problem. The United States, which enjoyed a historic bull market in the 1980s, most likely saw its longer-term credit cycle peak in 2006, in tandem with the country’s housing prices.
Taking these factors into account, Japan is at least a decade ahead of the United States from a credit-cycle perspective. What investment insights can we learn from Japan’s “lost decade,” and what are the implications for the United States?
In summary, if the Japan experience is the “New Normal,” we can likely expect the following in the United States:
- The private sector will deleverage, and the public sector (government) will leverage.
- Returns will be below historical averages for the foreseeable future, and bonds will most likely perform better than equities.
- A new structural bull market cannot begin until the majority of problem assets have been written off.
Against this backdrop, there is a case supporting the view that Japan, whose longer-term credit cycle has already bottomed, may offer an attractive investment opportunity for investors.
Click on the image below to download the full version of this article