Skip to main content
No. of Recommendations: 6
I would really like to know why Japan’s stock market is underperforming.

My conclusion: because the performance has been terrible.
Not the price performance, the business performance.

Price to book is not a perfect metric for valuing a broad index, but it's OK as a stake in the ground.
The P/B of the Topix (first section) is the same now as it was in July 2001, being 1.15. That was 17.83 years ago.
So, we can have a notion that valuation levels are comparable, and returns are measuring business progress rather than changes in valuation multiples.

The index has risen 1.79%/year since then. As multiples are about the same, the value of the index has probably risen roughly that much.
Add dividends, which are generally around 2%, to get the total return.
This is a pretty terrible return, so the Japanese market doesn't get a very high valuation multiple.
You can find better metrics of market valuation like CAPE, but they will general lead to the same conclusion.

In short, most Japanese companies have poor business economics.
The incremental returns on incrementally allocated capital are generally poor, for the simple reason that it's not generally a goal of management for that to be a high number.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.