Looking for Winners in Japan

09/22/2008 12:00 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carl Delfeld, editor of Chartwell Advisor Global ETF Report, finds two alternative ways to play Japan's market.

I have learned to be flexible in choosing a proxy ETF for a given market. Japan is an excellent example of this strategy. Instead of just reaching for the largest Japan ETF, the iShares MSCI Japan Index (Amex: EWJ) ETF, using a Japanese yen ETF like the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) would have been much better than suffering with Japan's sharp decline [over the last 12 months].

In a world of market turbulence, investors are seeking safe havens to find protection from the storm. The Japanese yen may serve that role for a time.

The Japanese yen is cheap. In real trade-weighted terms, the yen has not been this low since the mid-1980s.

It [also] seems unlikely that Japanese banks have much exposure to subprime lending. Total write-downs by Japanese banks so far are only about $17 billion, versus around $500 billion worldwide. With Japanese real estate prices now having come down to earth after ten years of deflation, the chance of domestic subprime blow-ups are nil.

Also, although Japan's economic growth is lackluster and the yield on the currency is a paltry 0.5%, the yen is somewhat like that other yieldless traditional store of value, gold-which, by the way, has not been serving that purpose very well this year.

The yen has been used as a funding currency for "carry trades" into higher-yielding currencies. Lehman estimates that Japanese retail investors hold positions in commodities and emerging market currencies worth over $300 billion. As these trades are reversed due to investors suffering losses, the money will likely come home. (It closed below $93 Friday-Editor.)

If you are looking for other options for Japan exposure, take a look at the new NETS Tokyo Stock Exchange REIT Index Fund (NYSEArca: JRE).

This new ETF makes a lot of sense due to the size of Japan's REIT market (10% of all global real estate investment opportunities), as well as the potential value it may unlock for investors.

Index Universe reports that recent data from Real Capital Analytics shows positive trends in Japanese real estate in terms of transaction levels compared with other global markets. Transactions in Japan have grown 11% in the first half of 2008, and Tokyo topped the list of office property sales, and Japan as a country is behind only the US in the office market, with $12.6 billion in transactions.

(It traded above $25 last week-Editor.)

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