A Rising Sun

08/19/2005 12:00 am EST


Alexander Green

Chief Investment Strategist, The Oxford Club

Alexander Green notes that he will leave short-term forecasting to Jean Dixon or Miss Cleo, while focusing on more important long-term predictions, such as turning bearish on Internet stocks in 2000, or bullish on Japan in 2003. Here, he updates his view on Japan. 

"Two years ago, we first called Japan 'the cheapest market since The Great Depression.' After 14 years of falling share prices, and declining real estate, the Nikkei 225 was trading almost 80% below its 1989 peak. Stocks were so cheap and sentiment was so negative, we felt that the whole Japanese market represented good value. And so we recommended the MSCI Japan Index Fund (EWJ ASE). Since then, the fund is up 41%, excluding dividends. But it's still early. And EWJ is an excellent vehicle for capitalizing on the situation.

"With more than $6.3 billion in assets, this index fund is made up of many companies you already know and patronize. For instance, the top ten holdings-which make up over a quarter of the fund- include Toyota, NTT DoCoMo, Canon, Sony, Honda, and Nissan, among other well-known international brands. EWJ also has a relatively low expense ratio (.64%) and, like most index funds, is highly tax-efficient.

"But why invest in Japan when its economic woes are so well publicized? Because despite the country's troubles, things are getting better. In the first quarter, GDP increased at a 5.3% annual rate, fueled by a rebound in consumer spending. Japan's unemployment recently hit a six-year low. Banks reported a sharp drop in bad loans. And persistent deflationary pressures have eased. (Japan's central bank is actually trying to engineer a gradual return to inflation.)

"The fund's holdings are yen-denominated, so we get a dollar hedge in the bargain, too. Remember, too, that Japan is still Asia's most advanced economy, with world-leading technology and unmatched infrastructure. The cost of doing business in Japan has decreased dramatically in recent years. Land prices, office rents, and labor costs have come way down. So have taxes and tariffs. And the government has instituted serious banking reforms.

"The nation also sits on a mountain of personal financial assets-more than $100,000 for every man, woman, and child. After a decade of negative stock market returns, most of this capital is sitting in low-yielding bank deposits. Even a small fraction of these assets returning to the equity market could give it a serious jolt. In short, no one can consistently and accurately predict what the market is going to do- either here or abroad. But when you sum up the Japanese market on the basis of risk and opportunity, it looks pretty darned attractive."

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