Do Dividends Give the Buy Sign in Japan?

08/18/2008 12:00 am EST


Chris Gilchrist

Editor, The IRS Report

Chris Gilchrist of says that with dividend yields higher than yields of government bonds, it may just be time to buy Japan.

In Japan, the average 1.8% average yield on shares is higher than the 1.7% that safe government bonds are paying-a classic buy signal.

That sounds low, but historically there has been no inflation. Jupiter recently pointed out that three times in the past decade when shares yielded more than bonds, a rise of at least 40% in the stock market soon followed.

The UK's FTSE 350 High Yield Index yields an average of 5.96%, almost 1% more than government bonds. But the FTSE 100 Index of the biggest 100 companies yields less than bonds at 4.34%, as do the broad US and European share indices.

So far, only Japan has crossed this threshold, primarily because many Japanese companies have raised their dividends much faster than their profits. They're catching up after a long period of low dividends, but with Japan's aging population living off its savings, investors want income, with dividends likely to tempt them back into the market.

Japan's 1.5% economic growth is low but also stable, with most economists predicting that it will be less affected by the credit crunch than the UK, US or Europe. Its banks are robust and its exporters are doing well. Both Toyota and Honda are increasing their share of the US car market thanks to the popularity of their hybrids. Farm machinery exports are benefiting from high food prices, and infrastructure projects in China and India need Japanese industrial equipment.

Despite the stable to mildly positive outlook, shares have fallen to 2005 levels amid the recent downturn in world markets. JP Morgan has just turned positive on the market.

Many funds have done worse than market averages, mainly because they have invested in the plunging shares of smaller companies. Large, blue-chip, "defensive" shares have done best and the only manager to have loaded up totally in this area is Paul Chesson of Invesco Perpetual.

This has been a long, horrible bear market in Japan with false dawns leading to repeated declines. But by most value measures, Japanese shares are now somewhere between cheap and ludicrously cheap. And I won't be surprised to see Japanese funds among the top performing investments over the next few years.

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