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The cost of capital is not the same as a P/E ratio. The cost of capital should refer to what rate corporations have to pay for capital. During the Bubble, Japan was famous for having a very low cost of capital (from issuing convertible bonds that paid interest rates of a few percent but were eventually turned into stock) as well as an investing culture that paid no heed to the P/E ratio (somewhat like US investors last year, or anyone who currently owns CRA). That resulted in average P/E ratios of something like 60-70 at the Bubble's peak with exceptional companies like NTT costing even more. Since then the P/E ratio has stayed high because although "P" was falling "E" fell even faster. I recently went through every page of the Japan Company Handbook and was struck by how many firms have had negative earnings for the past 3 years and now how negative equity. Certainly those firms are overpriced and not worth owning.

Currently, Japanese firms have a lot of trouble getting capital at all. Historically Japanese companies have relied on banks for financing more than on bond markets and those banks are no longer serving their purpose as financial intermediaries. Even if the capital were available, I'm not sure they would use it. It seems like a permanent gloom has descended on the business community here.

Japanese accounting has become more conservative (one example is the way retirement benefits now have to be accounted for) and that has had an effect on P/E ratios, but the main cause of the currently high ratios is that business is not good. A second cause is that Japanese firms tend to be less profitable, have lower ROE, and profit as a percentage of sales, than US or even European firms; when you work in Japan it quickly becomes apparent why.

There are some Japanese companies with reasonably low P/E ratios. My personal favorites are the consumer finance companies such as Takefuji, Acom, Promise and Credia, all of which have reasonable P/E's, good return on equity and solid earnings and top-line growth, even in the midst of our eternal recession.

Disclosure: Long Takefuji, Acom and Promise. No position in Credia but that could change any minute. ;-)
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