The Contrarian Case for Japan     

• Japanese benchmark stock prices are still trading at levels only around 1/3rd highs set over 20 years ago, domestic institutions are unloading cross holdings and foreign investors are �gpassing�h Japan for growth opportunities in Asia. Basically, investors have become severely apathetic about Japanese stocks, much like was seen in US stocks in 1979 and in commodities like gold in 2000.
• Japan has upwards of 200 companies trading for less than the cash on their books. Compared to PBRs and PSRs in other countries of 3~2 times, Japan�fs smaller companies are selling at average PBRs and PSRs of 0.40X and 0.83X respectively. Japan�fs smaller companies in aggregate would have to rise 5-fold to be on par with global peers. These stocks are basically the �ginvisible men�h of the stock market, with little domestic or foreign institutional holdings, no research coverage and management that barely tolerates outside investors. 
• History never repeats exactly, but it does rhyme. At the height of investor apathy toward US stocks, the whole S&P 500 was selling at a book value less than 1.0X. Then, the US economy was floundering on the rise of international competition, the Vietnam War, the oil shocks of the 1970s, a plunge in productivity, the hollowing out of American manufacturing, a series of currency crises and, most importantly, runaway inflation.
• Investors buying the S&P 500 in 1979 would have more than tripled their money if they held until Black Monday 1987. They would also have quadrupled their money in gold if they bought at the height of apathy toward commodities in 2000. The moral of this story is that major secular trends can take decades to run their course i.e., about 19 years, 11 months and 24 days longer than most professional investors are willing to tolerate. 
• While we seriously doubt there are any investors besides Warren Buffett who are willing to buy and hold for 10 years given the current backdrop of uncertainty, we just may be on the cusp of a major turning point for Japan?i.e., either Japan sees a major fiscal crisis in the next 10 years (and we get another global financial crisis), or the benchmark indices are three times higher than they are today. It could even be both of the above. 

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