Getting a Yen for Japanese Stocks
09/03/2010 9:10 am EST
Japan's currency keeps rising, making it a haven from US economic woes and creating bargains for investors. Here are three stocks to consider buying in the fall.
On August 30, the Bank of Japan, its country's central bank, announced a major new program of monetary stimulus. The governor of the bank even flew back from the Federal Reserve's Jackson Hole, Wyoming, conclave of the world's central bankers for the announcement. The same day, the Japanese government announced what it billed as a significant new economic stimulus package.
And the financial markets blew a giant raspberry.
The moves had been designed to slow the relentless appreciation of the yen, which has killed Japanese exports by making them more expensive and which threatens Japan's economic recovery. But the yen actually climbed on, finishing the day at 84.5 to the US dollar. That wasn't far off the 15-year high for Japan's currency that was set last week.
The yen seems doomed to keep climbing. Japanese exporters seem doomed to keep sinking. Japan's economy seems doomed to fall back into recession. And the country's central bank and government seem powerless to stop it.
That's not the end of the gloom in Japan. The country recently slipped from number two to number three, behind the US and China, among the world's largest economies. The government is bogged down in endless infighting. The country is one of the fastest aging in the developed world. And some of the country's great corporate icons—Toyota Motor (NYSE: TM), for example—are better these days at producing recalls than cars.
Interested yet? I am.
Sell Japan, and Give Me Some Bargains
Japan is still a huge economy and home to some of the great export companies with some of the most recognized brands in the world. Its corporate resources in robotics, biotechnology, and industrial-materials research and development are among the best in the world. Its stunning government debt is supported by one of the globe's deepest pools of consumer and corporate savings.
The yen will turn one day despite all the dysfunction of Japan's politicians. And the tide that has drowned even the best of Japan's companies will recede to leave the best still standing. And when that tide turns, I'd like to be able to say that I picked up some of those great companies at doom-and-gloom prices while most investors were selling them.
Let's start by understanding why investors are so gloomy about Japan. The yen is the focus of the gloom, but it's a symptom of the problem and not really the cause.
NEXT: Five Reasons the Yen's a Refuge|pagebreak|
Five Reasons the Yen Is a Refuge
The yen has become the global refuge of choice. That seems odd given the country's economic, political, and demographic problems. But for the short term, and that's all that currency traders and safety hunters are looking at, those negatives are outweighed by the positives of the Japanese currency.
First, perversely, the country's economic and political problems just about guarantee that anyone buying yen in the form of government notes or bonds won't get blindsided by a rise in interest rates that sinks the value of their holdings. The Japanese government isn't about to raise rates. It would lower them if it could.
Second, also perversely, the inability of the Bank of Japan or the Japanese government to do anything effective to weaken the yen means that buyers of yen don't have to worry about currency intervention sinking the value of their positions.
Third, to own yen, you don't actually have to have cash. In other words, you don't have to raise money by cashing out other investments to buy yen. You can simply borrow in the yen market to buy yen instruments. Because interest rates in Japan are so low, if you want to borrow to buy yen and you're a big institutional investor, you'll pay almost nothing. That makes the yen an ideal hedge on other investments because you don't have to sell those investments to put on the hedge.
Fourth, as long as we're speaking of hedges, the yen and the US economy are very attractively inversely correlated right now. The yen rises when worries about the US economy increase. Want to hedge the risk of US stocks? Buy yen.
And lastly, buying yen is a bet on a very strong and clear trend. You buy yen until data and attitudes toward the US economy and global assessments of risk change. Then, because the market is so liquid, you simply sell. (We'll see if the "everybody can get out without a problem" optimism is justified this time.)
Japan Moves, Market Laughs
If you think about the strength of the five reasons behind the yen's climb that I've just quickly outlined, you'll begin to understand why the moves by the Bank of Japan and the Japanese government left the financial markets so unimpressed.The economic stimulus package announced by the government amounted to about $11 billion. That's a drop in the bucket in an economy as big and as troubled as Japan's. The program just continues what we know is a failed policy. Japan has been so unsuccessful at stimulating its way to higher growth not because the government hasn't spent anything, but because the government persists in dribbling out stimulus funds in small amounts, with each package separated from the ones before and after by months of confusing pronouncements about what the country needs to do next.
(If this sounds to you a whole lot like current US policy, since the big stimulus package of February 2009, of very small stimuli—excuse me, "jobs" bills—separated by hemming and hawing about the need for more fiscal discipline, then I think you've got it exactly right. And the similarities aren't a good thing.)
The Bank of Japan's big move was bigger—$120 billion or so—but it wasn't very daring. The bank announced it would expand its program of lending at very cheap rates in an effort to get the economy going. But that will do nothing to stop the rise of the yen now (though it might have an effect later if the economy does recover).The Bank of Japan could have used the money to intervene in the currency market by selling yen in an effort to drive down the price of yen, but the bank is, with good reason, afraid this won't work. Similar efforts by the Swiss central bank to stop the rise of the franc failed miserably and expensively. And the Bank of Japan knows that if it intervenes and the intervention has no effect, it will remove the last worry that currency traders and speculators have about buying yen.
Better to keep that worry as a deterrent, even if it's not a very effective one. (For more on the limits of intervention and why the bank has so far not gone down that road whole hog, see my blog post "Can anyone stop the appreciation of the yen?")
If the Bank of Japan doesn't want to buck the currency markets, why would I want to try?
Well, I don't quite yet. I think we've got months of depressing US economic news ahead of us that will keep the yen moving higher.
NEXT: Three Stocks to Buy When the Time's Right|pagebreak|
Why the Yen Will Turn
But at some point, a lot of the reasons that I've given for the rise of the yen turn into reasons for the yen to retreat. Not massively, mind you. The consensus on Wall Street is that the yen will finish the year around 90 to the dollar instead of 84 or so now. I think that underestimates what the effect would be if everyone who was invested in yen ran for the hills at once. But whatever the year-end value of the yen, the direction will have definitely reversed.
And at 90 yen to the dollar, the best Japanese exporting companies will be profitable. They've pegged make or break for their sales and profits at 83 yen to the dollar. If the yen gets any higher than that, enough customers will be priced out of Japanese products to take even the best exporters into the red.
That makes a turn from the current 84 to 90 or so a way to leverage any improvement in attitudes toward the US economy. If investors think the US economy is improving, they will take the yen down versus the dollar, and that will radically change the profitability of Japanese exporters.
Three Companies to Grab When the Time Is Right
What kind of a Japanese company do you want to buy, when the time is right, to take advantage of this shift and leverage?
Canon is almost a perfect model. It has:
- Relatively low sales in Japan—just 22% of total sales in 2009
- A relatively high exposure to the US consumer
- A relatively late effort to move substantial production out of Japan, so that the company is really getting killed on the strong yen and its effect on sales
- Global leadership in its industry, which means there's really nothing wrong with Canon that a weaker yen wouldn't fix
I'd suggest two other stocks to consider for this strategy when we're close to a turn in the yen-dollar relationship:
- Komatsu (OTC: KMTUY), a maker of equipment for heavy construction and mining equipment. (For more on the company, see my blog post "If the economy is so terrible, why are machinery stocks relatively strong?")
- Textile- and carbon-fiber-maker Toray Industries (OTC: TRYIY). (For more on the company, see my post "Put more fiber in your portfolio.")
Did I hear someone ask "when?" I'd look to put real money into some Japanese stocks right around the US election in November. Whatever the results of that vote, it will remove some of the uncertainty from the US political and economic situation. At least in the short term.
At the time of publication, Jim Jubak did not own shares of any company mentioned in this column in his personal portfolio.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com