The Nikkei's climb to within striking distance of a record high marks Japanese stocks' long walk out of the investment wilderness as money, momentum and signs of change in corporate Japan put the market back atop global portfolios. It has been a long time coming: more than 34 years and long enough to scar a generation of Japanese investors, who through bitter experience have been sellers into this powerful rally. With the Nikkei up 50% in just over a year, however, global managers are now feeling the pain of missing out and scrambling to get in.
As Japanese stocks approach record levels last seen in the 1989 bubble-era, valuation metrics suggest they are still far from overpriced compared to historic levels and global peers. "From a historical perspective, Japanese stocks at a forward price-to-earnings ratio of 15x do not look expensive versus other markets, especially at current interest rate levels," said Miyuki Kashima, head of Japan investments at Fidelity International. More importantly, Japanese stocks trade at a low price-to-book value, meaning the shares are underpriced relative to the value of assets on companies' balance sheets.
