The Hard Money Has Been Made in Japan: The "Iron Coffin lid" Has Been Lifted

Long- Term Japan investors, including myself, have been waiting an eternity for this event to happen. The hard money has been made and the “easy” is to come!

The so called „Iron Coffin Lid“ has been lifted finally. And, much to my surprise, the domestic and international investment community could not care less. 

The degree of ignorance resembles the one surrounding the advent of Abenomics in 2012/2013!

Basically, the „Iron Coffin Lid“ is a resistance bandwidth in the Topix Index between 1700 and 1900 points that had been formed after the Japan bubble popped in the early 1990’s. During the past 30 Years the level has been briefly touched or pierced on several occasions. It was always followed by swift reversals and brutal downtrends often leading to lower lows in the Index. It left Investors and speculators in Japanese equities badly bruised and/ or ruined. 

The “Iron Coffin Lid” should be seen as a main contributor to the narrative of Japan being a buck searching for windshield and bets on the country’s revival a widow makers trade.

Being exclusively focused on Japan with my investments for over a decade now, I was taught by Market- San to never get surprised getting surprised investing in Japan. I am convinced this break- out will once again vindicate the lesson by Mr. Market hopefully learned, as it might again turn into a false dawn.

Nevertheless, there are numerous technical and fundamental aspects surrounding the current outbreak that warrant optimism:

• The break- out has a longer duration than any before, basically building up for more than 8 months 
•  Break- Out is more significant price wise
• Break- Out has been totally ignored/ not recognized by domestic and international investors
•  Last touch/ break took place in 2017/2018 was getting wide recognition on the WWW but failed. Although, failure was swift it was not as severe as former ones. Painful (the author admits) but nor devastating!
• Ever since the last touch/ piercing, international Investors (Speculators) were significant net sellers of Japanese stocks.
• Japanese retail investors, on the other end, have been net buyers. (Regarding their sophistication a lot has to be wished for. Nevertheless, attitude and knowledge has improved significantly. Investment horizon is lengthening and more weight is given to fundamental factors over technical issues.)
• Seasonality is positive è Japanese equities tend to perform strongly during autumn/ winter

Let us turn our attention to fundamental aspects surrounding this break- out-:

• Governance has significantly improved in corporate Japan è better profitability; significant increase of profits distributed to shareholders, etc. But financial pundits still focusing on the bad apples è Nissan/ Ghosn; quality control issues, etc.
• Shareholder activism in Japan is picking up steam but financial community oblivious about it è Japan's first successful hostile takeover by a hedge fund was basically not covered by the national/ international financial media
• Japan cheapest developed equity market on several counts. But Investors still underestimating the bargain è do not adjust for high cash balance and limited/ non- existent financial leverage
•  Japanese Yen severely undervalued on numerous counts è deflation was significantly underreported
• Short/ mid- term upside pressure on reported Inflation limited è change on reporting method this year that went unnoticed by investors
• Reported earnings understated è conservative nature of J-GAAP still not fully understood/ appreciated by Investors
• Japan the only developed country without financial repression è Japan the only developed country without negative real interest rate
• Since the start of Abenomics, corporate Japan has paid the increased shareholder returns out of free cash- flow è No financial engineering è Many balance- sheets rock solid
• Small/ Midcap sphere still under researched/ under followed è huge inefficiency/ mispricing still to be found for stock market operators willing to do some digging/ thinking out of the box

Conclusion  

The abovementioned fundamental/ technical bright lights surrounding the lifting of the “Iron Coffin Lid” are only an excerpt. Many more exist which are underappreciated by Japan observers, like absence of populism, pragmatic immigration policy, limited impact of COVID 19 on the economy, tight labor market, etc.

If the break- out is for real remains to be seen. Actually, I could not care less as it will certainly not affect my approach to investing in Japan. Nevertheless, would a break- out change the (negative) narrative about investing in Japan. 

The lifting of the “iron coffin lid” would silence the ignorant market pundits propagating the demise of Japan. It would render those commentators and their arguments were they belong to: The Garbage heap of history!