Tokyo stocks best way to play resolution of U.S. budget and debt ceiling crisis

10/04/2013 8:00 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Looking for a vehicle for trading on U.S. chaos on the government shut down and a potential debt-ceiling default?

Think Japan. Among developed markets Tokyo looks to be the most sensitive to shifts in U.S. sentiment thanks to the yen’s role as a safe haven currency. When fears of a U.S. default rise, the yen climbs against the dollar and Japanese shares sink. That’s because the rally in Japanese stocks that began in November 2012 is built on Prime Minister Shinzo’s weak yen program for stimulating the Japanese economy. Weak yen—sales by Japanese exporters go up. Stronger yen—increases in sales by Japanese exporters comes into doubt.

And that’s what we’ve seen in the last few weeks. So far in this crisis Tokyo stocks have reacted with way more volatility to the news from Washington when have U.S. stocks. That makes them, in my opinion, a preferred choice for profiting from the end of this crisis—whenever that might come and in whatever form. 

The Japanese yen moved up to 96.94 to the dollar today before pulling back slightly. (Remember that since the yen/dollar exchange rate is expressed in yen to the dollar a lower number indicates a stronger (more valuable) yen.) The slight rally so far today has cut into the yen’s gains for the week but the dollar is still down 0.8% for the period against the Japanese currency.

The rally in the yen as traders and investors have sought a safe haven in the current crisis has punished Japanese stocks far more severely than their U.S. counterparts. The U.S. Standard and Poor’ 500 index was down 2.2% from the September 18 local high through October 3. (That is even before today’s rally in U.S. stocks.) The Japanese Nikkei 225 index, on the other hand, is down 5.2% from the September 26 local high through the Tokyo close on October 4

The Japanese market has had to struggle against more than just a weakening dollar/rising yen, of course. There are fears that the government’s decision to go ahead with raising the national sales tax next year will sabotage the country’s economic recovery. And Japanese traders and investors have been disappointed that the Bank of Japan hasn’t moved more rapidly to stimulate the economy with new measures. Market sentiment has only gradually swung to a belief that the Bank of Japan will hold off on new stimulus until June 2014 or so in order to judge the impact of the April sales tax increase.

The swing in the consensus belief to no-Bank-of-Japan-move-until-June, though, is actually good news for Japanese equities, which no longer have to struggle under a cloud of disappointment every time the central bank doesn’t move. It means that stocks in Tokyo are relatively free to respond to any weakening of the yen on a resolution to the twin U.S. crises and to hopes for a Bank of Japan stimulus move in mid-2014.

I think you can use shares of Japanese exporters—such as Toyota Motors (TM)—or Japanese financials--such as Mitsubishi UFJ Financial Group (MTU)--as trading vehicles for this move. I mention both because they trade as very liquid ADRs in New York. If you trade in Tokyo, you should look at exporters more leveraged to the yen than Toyota--such as Hino Motors (7205.JP in Tokyo) or Mazda Motor (7261.JP)—or real estate development companies with more yen sensitivity than more diversified financials--such as Sumitomo Realty and Development (8830.JP.)   Toyota and Mitsubishi UFJ are both members of my Jubak’s Picks portfolio http://jubakpicks.com/

As for when, that depends on your read on U.S. politics. The S&P 500 closed up 0.71% today on a belief that recent statements from Republican House Speaker John Boehner indicate that he will use Democratic votes in the House to pass a debt ceiling extension. I don’t share the market’s optimism; in fact, I’ve got trouble seeing anything new in today’s rhetoric and I’d say today’s market reaction is wishful thinking. (Or position squaring before the weekend.)

The longer you think the crisis will drag on, the longer you should put off any buys in Tokyo since a continuing crisis will just push the yen up further and contribute to continued weakness in Tokyo equities.

I’m keeping my powder dry at the moment.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Mitsubishi UFJ Financial and Toyota Motor as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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