Characteristics of Japanese stocks

Japanese stock market is not as usual. It has short trading hours, fewer trading days and separate listings at one exchange. Furthermore, there are cultural reasons that make buying stocks in Japan different. I will focus on who have those shares, who they are and how you can make extra by avoiding common mistakes Japanese investors make.

Basics of Japanese stock market
It is hard to trade Japanese shares because the market is not open. The Tokyo Stock Exchange (TSE) opens from 9:00 to 11:30, and it closes an hour for lunch. It reopens at 12:30 and ends at 15:00. You can only trade in 5 hours a day. In addition, Japan has so many holidays that there are only about 244 trading days in a year. TSE is definitely not hard-working.

TSE has four divisions: the first section for large cap, the second section for medium cap, Mothers and JASDAQ sections for emerging stocks. There are mainly two indices that track TSE: Nikkei 225 and TOPIX. The former is a composite of 225 well-known companies so it's like Dow Jones Industrial Average. The latter includes all of the first section large caps so it's like S&P 500. There are three other minor exchanges but TSE is the biggest.

Japanese stocks gyrate

Basically, Japanese stock market as a whole is just swinging and not growing for more than two decades. In recent period, there are four noticeable cycles: the Japanese asset price bubble, the dot-com bubble, US housing bubble and Abenomics bubble. In the asset price bubble, real estate and stock prices went up so much that prices are not recovered yet (or never). At the height of it, Nikkei index had P/E over 50. The market had a wild ride until the US experienced the dot-com bubble. After that, the Bank of Japan (BOJ) started the first QE and Japanese Yen weakened. Then the US housing bubble began, and as the risk appetite grows, Japanese stocks rallied. Finally, the financial crisis of 2007-08 blew them all up and now, we are in the Abenomics bubble. As you can see, Japanese stock market are just moving up and down for long, and not growing.

Shareholder breakdown

As of 2014, the biggest shareholders of Japanese stocks are foreign investors, who own 31.65%. Then financial institutions follow with 27.37%. They are banks, insurers and trusts. The third biggest is the business corporations, with 21.28%. Lastly, Japanese individuals make up 17.32%. The Japanese stock market is dominated by foreigners and corporations.

Corporate world of Japanese stock market
Together, financial institutions and business corporations in Japan have about 48% of Japanese stocks. The high institutional ownership can be explained by two phenomena: cross ownership and family business. The first one is a Japanese tradition. By holding shares of related, client or friendly companies with each other, businesses tried to protect themselves from corporate shakeups and hostile takeovers. The second one reflects Japanese view of business. Some founders think companies are theirs because they made them. It's not difficult to find the same family names in a major shareholder list of an even listed company. The family started, the family owns and the family rules. Besides, BOJ and Japanese pensions funds are increasingly buying Japanese stocks through ETFs and trusts although you can't see them directly because they're hidden by proxy. So the institutions govern the market.

Savers gamblers, conservatives idlers
Appearances of Japanese individual stock investors are small, but their behaviors are noticeable. As you can expect, majority of Japanese people don't buy stocks and there's a reason; Japanese people are obsessed with saving money and store at banks or under mattress. Asked about stocks, typical answer is like, "I heard owning stocks is risky." You would often see a person who made huge losses in stocks or futures in Japanese dramas. Some even think it's impolite to talk about money because money is considered dirty. Japanese people even invented words like "jitsu-gyou" (実業) and "kyo-gyou" (虚業). Jitsu-gyou means solid, real business like making consumer products. Kyo-gyou, on the other hand, means soft, superficial business like finance, consulting and creating software. Things you can't touch or see are regarded as facade.

It may be contradicting, but Japanese people also like gambling. Lottery, horse racing, bicycle racing, boat racing and Pachinko are just examples. Saving money and betting money are different, so you could find gambling behaviors in the stock market, too. Japanese speculators like to buy near bankrupt companies, unprofitable new businesses, penny stocks and options. Some trade on margins. So you need to understand this two-sidedness.

Not everyone is gamblers, of course. There are conservative people who only invest in big, established businesses. "Well, I know Coca-Cola, McDonald's, Toyota and Sony, so let's buy them and I'm done." See something's wrong? That's the last part.

It is surprising that some people enter the market without even knowing the ABCs of stock investing. Most Japanese individual investors are uneducated, and there is no formal education of economics and finance in Japan. And as I said above, some people just don't talk about money, so they never learn what it takes to make money in stock markets.

Getting an edge in Japanese stock market
I described Japanese investors as savers gamblers, conservatives idlers. So do the opposite of what they do to have an edge. Savers won't invest, so just ignore them. Gamblers like to play with fire, so stay away from newly formed businesses, especially IPOs. Typically, fields such as information technology, software, biotech, consulting, HR and medicine are gamblers' list. Conservatives buy solid, established businesses no matter what. That means these stocks are likely very expensive. They also like well-known companies, so avoid large and prominent stocks. Yes, there is a price for fame. Idlers don't study. It requires doing some research, but look for lesser-known, but profitable and growing companies at a discount. They are neglected.

There are two other tips to take away. A few companies provide employee stock ownership plan and if you can find that in a list of shareholders as employee owners, that usually is a good sign. Japanese executives like to stay anonymous because of cultural reasons, and there is a research that if you invest in companies with visible faces, the returns will be better. Visible means executives appear on websites and documents, and communicate with shareholders a lot. Transparency matters.

Hurray! Only those who live in Japan will benefit
About one third of listed companies in Japan have their own stockholders' benefits program. Types of benefits vary from their own products and coupons to gift certificates and services. The program only applies to those who have address in Japan so it's unfair for foreign investors, but it's fun to receive them. In addition, companies with benefits tend to have stable, longer-term individual investors so their stocks are more likely to stay calm in times of market turmoil. However, especially the case for large caps, some stocks attract too many people that prices get too expensive.

Summary
Japanese stock market has short trading hours, fewer trading days and two main indices (Nikkei and TOPIX). The two indices are swinging and not going up for long time. Foreign and institutional investors dominate the market. Japanese individuals are less likely to invest and when they do, they have tendency to buy risky or well-known companies without calculating their values. Shareholders' benefits are unique programs for paying back to owners but only available for domestic investors. Japanese stock market is tricky, but there are some treasures left behind.