Japanese stocks are starting to look a tad bit too expensive...

With Shigeru Ishiba just sworn in as Japan's new prime minister, the Nikkei 225 took a sharp 5% drop. But don’t be fooled by a momentary stumble, the market has been soaring, recently breaking its all-time high from 1989.

Yes, I am referring to that 1989 bubble; those surreal days when the land around Tokyo’s imperial palace was supposedly worth more than all the land in California.

This plot of land was supposedly worth more that the state of California in 1989

Then, the market crashed, and for decades, Japanese equities were stuck in a long, slow deflationary slumber. This should have been a value investor's paradise, but few took notice, until Warren Buffett’s Berkshire Hathaway finally got involved in 2020. It felt like validation.

Now? Well, let’s just say things are getting a bit expensive, and I’m not the only one scratching my head.

Valuations climbing - But where’s the growth?

Yes, the Nikkei 225 finally broke its 1989 all-time high in February this year, pushing past the long-held psychological barrier.

Great news, right? Maybe not.

The average price-to-earnings (P/E) ratio has surged to 17.5 ​(Siblis Research), and while that doesn’t scream "danger zone" like the 60+ P/E we saw in the late ‘80s, it's still eyebrow-raising for Japan. This isn’t a market that justifies a growth investor’s optimism, let alone a value investor’s dream.

From 2009 to 2024, the Nikkei 225 has seen an impressive recovery. In 2009, the Nikkei was languishing below 9,000 points, but as of 2024, it's at the 40,000-point mark. That's over a 400% increase in market value. On the surface, this sounds great - until we look at the earnings. Earnings per share (EPS) has increased, but not nearly as dramatically.

In 2009, the EPS for the Nikkei 225 was approximately 100, and in 2024, it’s hovering around 181​ (FRED)​. This represents a growth of about 80% in earnings over the same period.

So, while stock prices have more than quadrupled, earnings haven’t even doubled. This discrepancy shows a clear divergence between market performance and the actual productivity or profitability of Japanese companies. We’re seeing the market heat up, but the companies themselves are mostly just plodding along. Actual growth? Meh, it's hard to find.

Japan’s eternal bottleneck: Productivity and governance

Japan’s corporate productivity remains stuck in first gear…

Sure,