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Sunday, March 18, 2007

Joking aside, the recovery offers a lifetime opportunity


The Japanese Money Tree: How Investors Can Prosper from Japan's Economic Rebirth, by Andrew Shipley. Pearson Education, 2006, 245 pp., $24.99 (cloth)

Derided during the 1990s by foreign fund managers as "the sick man of Asia," Japan's weak growth performance after the economic bubble burst made it the butt of jokes for over a decade.

But the joke was on them in 2005, when fueled by an export-led recovery, reform optimism and a forecast end to deflation, Japan's stock market outperformed the West with an impressive 40 percent gain.

While sentiment cooled with the following year's 7 percent rise in the Nikkei index, the stars have aligned in 2007 for the release of Andrew H. Shipley's first book, "The Japanese Money Tree."

The latest in a string of releases based on the "Japan is back" theme, Shipley's work aims to identify where investors can grow their own money trees as the recovery blossoms.

An economist by trade, Shipley at times gets bogged down in details that are of interest only to those in the finance industry, such as hedge fund strategies. But while economics may be known as the "dismal science," the work is far from gloomy, and for good reason.

With growth rising at its fastest pace in three years, exports surging and corporate profits at record levels, there is some truth to Shipley's claim that Japan currently offers investors a "once-in-a-lifetime opportunity."

Past returns are no guide to future performance, as 2006 showed. But in a collection of interviews with key players across government, business and academia, the author finds investment opportunities that may prove long lasting.

Japan's high level of corporate investment in research and development is seen yielding dividends in the form of intangible intellectual property assets. Fujitsu, Matsushita Electric and Hitachi are three companies making this a corporate strength -- and a source of lucrative revenue flows. After swinging into the black in 2003, Japan's net overseas patent royalties topped 500 billion yen last year.

The divestment of noncore businesses by companies such as Yamanouchi Pharmaceutical and Ajinomoto is also considered an opportunity, particularly for private equity funds that specialize in corporate turnarounds.

While Takafumi Horie may have scared the Japanese business community witless with his high-profile takeover battle against Fuji TV for Nippon Broadcasting System, Shipley views it as a positive in having forced company directors to consider mergers and acquisitions.

In the real estate sector, moves by developers to remake Tokyo are described as creating the "Manhattan of Asia." Mitsubishi Estate's redevelopment of the Marunouchi district, Mori Building's Roppongi Hills and Mitsui Fudosan's Tokyo Midtown project are cited as examples of how less restrictive development laws (compared with those of the United States) can foster innovation.

And with the low lending rates and high yields available on Japanese commercial property, both foreign and local investors continue to pour funds into the sector.

The author also provides an insightful analysis of how Japan's postwar dependence on the U.S. market may just be a blip in history compared with the country's ancient -- and future -- trade reliance on China.

Shipley's bullishness even extends to Japan's great bugbear of a declining population. According to the author, the government's forecasts are overly pessimistic and a rise in the fertility rate is likely once the economy gets on a sounder footing.

Similarly, the pension system is predicted to move into the black by 2023 due to rising contributions and lower payouts.

Amid such optimism, it's sobering to note that Japan's public debt is set to grow further due to rising interest rates. Already the highest in the OECD at around 150 percent of gross domestic product, it will take more than a few years of economic growth -- and tax hikes -- to scale this back into more manageable proportions.

Shipley also admits that the economy is still not strong enough to endure another overseas downturn, with Japanese share prices having plummeted during the two Asian and U.S. recessions of the past decade.

The hedge funds and foreign investors that the author refers to as having renewed interest in Japan are just as likely to switch focus should the growth fade. And despite moves by the central government to promote foreign investment, the planned easing of takeover laws to allow so-called triangular mergers with overseas companies has been a drawn-out process due to local business opposition.

Much will depend on how Japan manages its hot-cold relationship with the emerging economic superpower of China, and whether tentative moves to restructure the nonexport sector through special deregulatory zones are extended throughout the country.

While Shipley's work will disappoint specialists for its lack of specific information on investment opportunities, it does present enough evidence for the general investor that Japan is no longer the punch line to a bad joke. And that's something we can all smile about.



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