If this happens it will cause a lot of havoc for investors who rely on the iShares MSCI EAFE Index Fund (EFA). EFA allocates 23% to Japan. If Japan truly blows up as some are calling for then it stands to reason that any equity fund heavy in Japan, like EFA, will get hit very hard.
I've never liked Japan as an investment destination and obviously avoiding it has been right far more often than it has been wrong. I've written a lot of posts about the merits of country selection and while not everyone will want to do this country avoidance could become very important.I am not aware of any broad based fund that avoids Japan but the country can be avoided by anyone not willing to pick countries. As a substitute for EFA a combo of WisdomTree Asia Ex-Japan High Yield Equity Fund (DNH) and Vanguard European Stock ETF (VGK) gives broad coverage and bypasses Japan. Some clients own DNH, no one owns VGK.
Clients do not have heavy exposure to big Western Europe as I think they have some big problems too just not as bad as Japan. But the context here is people who do not want to pick countries but might really want to avoid Japan.
On a lighter note Red Sox legend Johnny Pesky turned 90 over the weekend and threw out the first pitch last night. The way he was bouncing around I am pretty sure he could have gotten a hit off of Red Sox starter Michael Bowden (a September call up) who got racked by the Blue Jays.
Update at 5:55 am; I forgot, today is the fifth anniversary of the start of this site. I downloaded Firefox and blogger was a preloaded bookmark. It started out not being about the stock market but I ran out of things to say after a couple of days. Five years, yikes.
26 comments:
I thought japanese bonds were denominated in yen for the most part. If so how does Japan blow up? if you do not want to roll over your poorly valued interest bearing bonds the japanese will be happy to give you poorly valued yen paying no interest.
This would lead to a flood of yen and japan will finally get the inflation they need and eventually make their outstanding debt a smaller percentage of gdp.
OK maybe you would define that scenario as blowing up but it really is just highly inflationary
i guess u didn't read the article. blowup=default
I fear that avoiding Japan as an investment destination would only be the first line of defense in case of default. The implications would ripple far from those shores which, ironically, is probably an argument in favor of active management that got dunned here yesterday.
I didn't read the article but they own a yen printing press. No country that has debt denominated in their own currency can default. They can devalue their currency, but they can not default.
The impact of Japan can be reduced through broad-based regional funds such as iShares MSCI Pacific ex-Japan (EPP) but Anon 6:13 is right, Japan will not default and, if the Yen loses relative value, foreign holders of Japanese assets will be partially compensated to the degree their home currency appreciates against it.
Congrats on 5 years!
I'm not a fan of Japan, either. For some of my "what's allocated to EAFE type stuff" I use the Vanguard ETFs that split Europe and Asia. It's not a perfect solution, of course.
there is also EPP; broad based asia ex-japan
Some readers may have seen the Ken French paper that found that Japanese equity investors were 98% invested in Japanese equities during the 1990s. They had the highest domestic bias of the large economies at the time. I looked for a more recent update on the figures, but all I could find is that Japanese foreign exposure was increasing at a slower amount than other major economies.
The Economist recently had an article describing how Japan had just replaced the ruling political party. http://www.economist.com/opinion/displayStory.cfm?story_id=14363159
Japan has basically been a 1 party system since after WWII. This could represent a major change.
Japan basically needs to get the government economist's hands off the economy and money supply, outlaw cross-holding of shares by corporate "competitors", and start making babies. - Not bad advice for the US too actually.
Hey, Roger. Congrats on five years! I remember when I first started running across your posts. You must have been on a Canada binge (I only read the headlines) and I dismissed you as irrelevant to my needs. Big mistake. You've taught me a lot and, if I had paid attention earlier, I'd be clawing my way out of a shallower hole today. Thanks for all you share with us.
Great work, Roger. Looking forward to 5 more!
Wow, thanks for the scoop Roger...its it nice to get some "inside" dope before the rest of the world finds out..
Nobody ever reads Barrons, so we will all have a leg up on the rest of the world...
wow, 12:31 thanks for being a troll
Congratulations, Roger, on five years of blogdom.
Every post has always had something worthwhile to use, ponder or just enjoy.
T
Roger,
In bocca al lupo!!!
Jeff From Milan, Italy
Do you have an all-time favorite post, Roger?
Roger,
Love the blog, but can not figure out why you do it. I do hope you continue though
thank you T and Jeff.
all time favorite? Interesting question. Two stick out. One called Send In The Bears? in December 2007 and one from last November titled Send It In Jerome!. The former was important and the latter fun as I got to meet Bill Raftery in Maui.
There is nothing more annoying the men that cannot have a conversation, even on a blog, without injecting some comment about baseball, baskeball, or football.
Is it just pure ignorance?
On a lighter not there was a kniting bee down the road that I attended over the weekend... boy how exciting
well then this is absolutely the wrong blog for you. sports mentions galore since day one and that won't be changing.
5 years wow!
Congrats and keep up the good work.
Vincent, reader since 2005.
thank you for staying with me
The only ignorance around here is how you missed the sports comments over the past 5 years and are somehow surprised.
I am confused: you assert that not investing in Japan, or underweighting it, has been wise. Yet, if I compare returns (both standard returns, and total returns including dividends), for regional indices (MSCI N America, Japan, Europe will do as an example), Japanese equities were a safer place for your money than N American equities, if one looks at: Aug 2008 to Sep 2009 (pre-Lehman shock to now); Dec 1998 to Sep 2009 - i.e. more than 10 years.
I am not suggesting that Japanese equities are a particularly great place to invest. But I find it bizarre how many people come out with these unsupported statements that it makes sense to underweight Japan. Japan does well some years, and poorly in others. But over the long run - unless you rather cruelly start your data series in 1989 - it simply has not underperformed global markets (and especially US markets) in the way that is often suggested. As a good bottom up investor, it has been quite possible to generate good returns in Japan.
long running thread here has been very underweight europe, underweight US and zero weight Japan.
i am a top down person.
from the top down there is a serious aging problem which dominoes to many other financial issues tied into the massive debt load. against that back drop there will absolutely be some stocks that do well but it is a lot easier to find good holds where there is a tailwind not a headwind.
Fair enough - and apologies for not having realised you also underweight N America / Europe. (Although for a developed market, Europe has been pretty impressive over recent years (5-10, anyway)).
But I do still questionmark the idea of zero weighting Japan. As per my last comment, it's not as if Japan in itself has been such a poor place to invest. And it's oversimplification to say that the demographics and the debt to GDP make it a poor investment target.
Realistically, so many people have been "Japan bashing" for so long, that I think Japan has far more potential to surprise on the upside than on the downside. And when Japanese equities move, they really shift... zero weight is risky from that perspective.
But each to their own...
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