Investors of a certain age may recall the 1984 film, The Karate Kid. The classic features a 17-year old American called Daniel LaRusso.
Daniel is bullied in school. The distraught youth runs into an old Japanese, who becomes his mentor.
Miyagi teaches him karate. Daniel then takes revenge on his tormentors by defeating them in karate. He also wins over his love interest.
Karate is not the only thing that Miyagi teaches Daniel. In his karate training, Daniel learns discipline and attention to detail. Before he masters karate, Miyagi makes Daniel paint fences and wax cars.
Miyagi is obsessive about presentation, even if it is irrelevant to the product. The floor that Daniel trains on has to be clean and shiny. His uniform is spotless white.
The movie foretold the rise of the Japanese stock market. In the five years after the film’s release, the Nikkei rose 420%.
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The boom was powered by Japanese electronic exports. The symbol of that golden age was the Walkman by Sony Group Corp. The Walkman was a portable cassette player that swept the world in the 1980s.
Long before the iPhone, the Walkman was the coolest accessory. It personalised music in a way that no device had done before. You could listen to Abba in the gym, while the gym was blasting Pink Floyd.
The Walkman was the embodiment of Miyagi’s training. The Sony factory workers had to clean the floor every morning. The product itself was shiny and elegant. Other electronics companies had produced similar products, but none of them were as well-designed as the Walkman.
The Walkman was also a symbol of Sony’s ascent. The conglomerate became one of the largest companies in the world by market capitalisation. Sony’s shares rose 180% in yen terms from 1984 till the bursting of the Japanese boom in 1989. The returns were 390% in dollar terms, as the yen surged.
The 1989 collapse not only affected investors in the stock market. The Nikkei is down 29% in US dollar terms since the 1989 peak.
Japanese-own electronics industry also floundered. Sony was hard pressed to replicate its innovations like the Walkman. There was poor investment in software, as opposed to hardware such as electronics infrastructure.
Apple eclipsed Sony through its superior software. The Sony ambled through the 1990s with a CD and MP3 version. However, the iPod and the iPhone that came not long after have floored the Walkman. Nobody under the age of 30 can remember the Walkman.
Comeback Kid
Though the Walkman is forgotten, Karate Kid is making a comeback. This year, Netflix has released a remake of the movie. It is a series called Cobra Kai. Daniel, now a middle-aged car dealer, has returned to fight his old foes.
There are some strange parallels 38 years later. The yen had lost a fifth of its value in the year before 1984. In the last year, the yen has dropped by a third. The Bank of Japan has kept interest rates low, while the US Federal Reserve has hiked rates.
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The battering of the yen may make Japanese exports cheaper. Japan may be on the throes of a manufacturing boom.
Though the Walkman has been dispensed with, Japan is still a leader in technology. Toyota Motor Corp has the ability to produce electronic vehicles at lower costs to Tesla. Lasertec Corp could double its semiconductor exports in the next three years.
Valuations are dirt-cheap in Japan. Price-to-book value (P/B) is a useful yardstick. Book value is a neutral metric. Unlike earnings or revenue, it is not easily manipulated by accounting standards. Japan is trading at 1.3x P/B, which is less than a third of the US’ 4.5x. It is by far the cheapest market among developed countries. It is also 35% below its level five years ago.
Japanese companies have low debt. Over half the non-financial firms on the Nikkei have net cash. This is superior to any other major market.
There is no shortage of ways to invest in Japan. iShares Japan Equity Index is one of the more balanced funds. Other proxies for a Japanese include FSSA Japan Focus, which is technology-heavy. Investors should not be deterred by Nikkei‘s rout. Japan may fight back like the Karate Kid.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column
