Japanese Equity Market Valuation

Abstract

Valuations in the Japanese equity market have been persistently puzzling to outsiders, and to many insiders too, over the last decade. The most common rule-of-thumb valuation measure used by investors around the world is the price:earnings ratio (PER). This simply divides the price of a stock by its earnings per share, indicating how many years of earnings it will take for a holder to earn back his original investment. In the case of a whole market rather than an individual stock, this calculation becomes the total market capitalization divided by the aggregate net profits of the market — in other words, the number of years it would take the total market to earn back the cost to an investor of buying the entire market. Japanese PERs were relatively high by international standards in the early 1980s, but foreign investors were generally comfortable that this could be explained by the higher growth rates of Japanese earnings. By the mid-1980s, however, the PERs were becoming so extremely high by comparison with other markets that this explanation was straining credibility. And PER levels have remained comparatively high in the early 1990s.