Buying Stocks and Big Macs at Half Price in Japan
American Investors Would be Wise to Maintain Some Japanese Stock Exposure
Japan and the United States ended 2011 with equivalent cyclically adjusted price-to-earnings (CAPE) ratios of a little less than 18. From 2011 through today, the United States CAPE nearly doubled to 34, while Japan’s increased almost increased by 50% to 25. A lot of the divergence occurred this year, while the S&P 500 raced ahead on a year-to-date return, through 12/19/2024, of 26%.
During this same time period, the Japanese Yen fell in half relative to the US Dollar. Where it took ¥80 to buy a dollar in 2011, today it costs ¥156.
Put another way, if an American flies from San Diego to Tokyo and heads to McDonalds, they can buy a Big Mac for a total cost of $3.29. This same Big Mac back home would cost $5.69. Whether thinking about exchange rates or Big Macs, the Yen is materially undervalued relative to the US Dollar.
Equally importantly, citizens in Japan would like their currency to appreciate, while many Americans set to come into power next month, would like to see a weakened dollar to increase exporters’ competitiveness.
Since 2011, as the Yen weakened relative to the dollar, American investors who owned Japanese stocks received a paltry 6.6% per annum return, compared to American investors who owned the exact same stocks, but hedged out their exposure to the Yen. Hedged Japanese stock investors received 13.8% p.a. Japanese citizens and even the Japanese Central Bank who owned American stocks would have received the 15% p.a. S&P 500 return AND an additional ~3% a year return from yen depreciation. 18% per year returns for buying the S&P 500 index would encourage a lot of Japanese to own US stocks. If the Yen starts to appreciate relative to the US Dollar, would Japanese savers be more likely to buy local stocks? Would American investors take a page out of the Japanese savers’ playbook and start to buy more Japanese stocks? We’ll check back in 2035.