Look to the east for cheap yield – By Merryn Somerset Webb

This brings me to one of my favourite long-term investments – what many readers insist is my “blind spot” and a market that no one has used the word “bubble” to describe for over two decades. I’m talking about Japan, of course (full disclosure: I am on the board of BG Shin Nippon, a Japan-focused investment trust). We know Japan is cheap on all sorts of levels. Paul Bennett of Walker Crips puts it on a price-to-book ratio of about 1. That’s a 40 per cent discount to the average price-to-book of the stocks in the MSCI world index. At the same time, 40 per cent of companies listed in Japan have net cash equal to their stock market value (so there is some real protection on the downside!).

There’s more. Price-to-cash flow is about six times – so much lower than the current p/e, something that suggests to Bennett that “large corporates in Japan might still low ball profits to avoid high corporate tax levels.”

Still, given that all anyone cares about these days is yield, let’s just look at that. No one considers Japan to be a market worth investing in for the dividends. But that might be a mistake.

Over the past decade or so, dividends in Japan have risen faster than in any other market and the nominal yield on equities is about 2.6 per cent. Pah, you might say – that’s less than the yield in China. But add back in Japan’s deflation at say 0.5-1 per cent and you get a real (inflation-adjusted) yield of 3 per cent plus. In the US you are getting a real yield of about zero. In the UK you are getting around 1 per cent; in Europe around 2 per cent; and in China something negative – how negative depends on what you think inflation is.

I’d like to say that this puts investors in a win-win situation. Long term, the Japanese market looks like a steal. If the market as a whole doesn’t rise, dividend stocks still should – from 1989, notes a report from Allianz Global Investors, the equity market in Japan lost 50 per cent of its value but anyone investing just in high dividend payers would have “managed to achieve a positive return”. And if that doesn’t happen, domestic investors will at least have their 3 per cent and foreign investors should see the real bit of their income return in relative currency strength and (as they long have) make a turn on the strong yen.

Given Japan’s history of false dawns, I’m not going to say the win-win words. But I will end by pointing out that across the world, Japan is the only market giving investors what they insist they want – cheap yield. One day, investors will get around to buying it. If you want to be in the vanguard, there are several good Japan equity funds, but for an income-focused one, you could consider Jupiter Japan Income.