Japan: A Rising Sun?

10/07/2005 12:00 am EST

Focus:

Four leading advisors are now looking to Japan. Here, Elliott Gue suggests a pair of Japanese banks;  Martin Weiss likes a Japan ETF; Jim Lowelladds a Japan mutual fund; and John Murphy looks at the inter-relationship between Japan, the US, gold, and inflation.

(For more information on the advisor cited below, please click on their photos.)

Gue, Elliott"After the bursting of giant stock and real estate bubbles in Japan in the 1980s, prices of stocks and real estate fell for nearly 15 years," notes Elliott Gue in Wall Street Winners. "Despite its zero interest rate policy, the world’s second-largest economy never saw sustainable growth in the 1990s. Its main problem was one of crippling deflation. Thus, it should come as little surprise that the Japanese have been loath to invest in either stocks or real estate assets. Instead, most people held their cash in bank deposits yielding next to nothing. This crippling, vicious circle is now coming to an end.

"Japan’s real estate market has seen increased buying and selling activity, and prices are rising steadily in many parts of the country for the first time in nearly 15 years. It also appears that businesses and consumers are beginning to spend money. Moreover, the country’s banks are healthier than they’ve been in more than a decade. The Nikkei 225, Japan’s widely-watched market index, broke above 12,000 in August after previous attempts in 2002, 2003, and 2004 failed. But this year, the Nikkei finally and significantly rallied above that key 12,000 level. At a minimum, the Nikkei should see a move to the 15,000 level during the next year or so.

"One way to play the Nikkei’s move is with the banking sector. Our favorite Japanese financial is Mitsubishi Tokyo Financial Group (MTF NYSE). This bank has gone the furthest toward cleaning up its legacy of bad loans. Loans to bankrupt companies and high-risk borrowers were roughly $40 billion in 2002. Just two years later, this was than $13 billion. Nomura (NMR NYSE) also looks attractive at current levels. The company offers security brokerage, investment banking, and asset management services. As Japan emerges from deflation and the stock market recovers, there’s real scope for renewed interest in equities."

Weiss, Martin"Japan is awakening from its slumber," says Martin Weiss , in  Money & Markets . "For fourteen long years, the second largest economy in the world has been in a stupor. It has been mired in an on-again-off-again depression. Repeatedly, Japan’s Ministry of Finance and the Bank of Japan tried to jump-start their economy. Repeatedly, investors got burned. But now, Japan is swinging up again. And this time, it’s for real. Therefore, it’s finally time to invest in Japan again.

"To profit from the new trend, aggressive investors can buy iShares MSCI Japan Index Fund (EWJ ASE).  Since trading in a narrow sideways range between $10 and $10.50 per share, in August, EWJ literally jumped out of bed. It proceeded to move up in a near-vertical, non-stop blast. And it’s been mostly rising ever since. But it’s still in a blast-off phase. And any minor correction should be welcomed as a new buying opportunity."

Lowell, JimMeanwhile, Jim Lowell, editor of Fidelity Investor and The ETF Trader, sees Japan as an opportunity to invest in China, but with less risk. He also suggests a fund that can be paired with the exchange traded fund, EWJ, featured above. Here, in an article for marketwatch.com, he explains, "By buying Japan, you can invest in the potential growth of China without owning the basket of risks attending the attempt to own Chinese stocks. That's good news so long as you keep in mind that China's economic growth still holds the key to Japan's market activity.

"Yoko Ishibashi has been managing Fidelity Japan (FJPNX ) since June, 2000. Ishibashi's track record isn't stellar overall--owing to a character trait of serving up a better offense than defense. It's precisely this manager's offense, however, that's of interest to me over the long haul of a recovering Japanese economy--and as a complement to the defensive exchange traded fund iShares Japan.

"This year, FJPNX is up 19% vs. the MSCI Japan Index, which is up roughly 13% through the end of September. The top-10 holdings reflect an active manager doing their level best to find value and growth in their own backyard. As a complementary role in an equal weighted stake for a growth portfolio, FPJNX and EWJ will provide a more globally sensitive group of names; good ballast to mitigate the local and regional risk of this dynamic duo--and propel profits."

Murphy, JohnJohn Murphy, editor of Stockcharts.com, has been correctly forecasting a breakout for the Japan in recent months, calling it "one of the best values in the world." He now says, "Japan is outperforming the US for the first time in years. Japan has been the world's worst stock market since 1989. That's why its new global leadership is worth paying attention to and may carry a larger message. Part of the reason for the upturn in Japan may have to do with the idea that deflationary forces that have dominated the global economy since the late 1990's (coming mainly from Japan) may finally be giving way to a new inflationary cycle. In other words, Japan may be a new inflation play.

"Gold may be sending the same message, as seen by the the close correlation between the iShares Japan ETF and gold. Since August, gold and the Nikkei have risen together to multi-year highs. That may not be a coincidence. Which brings us back to our main premise: Japan's bullish breakout may carry several messages. One is that it's a good place to have some money. Another is that it may be signaling a shift toward global inflation. And, if that happens, global interest rates could start to rise as well. It's quite possible that I'm stretching things a bit with this analysis. But it makes as much sense as anything I've read anywhere else. Think about it."

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