The beleaguered nation and economy is in trouble now, but the time to get positioned for a recovery may soon be upon us. Here are several stock and ETF ideas as well as the key risk factors to consider.
It has been three months since the horrific Japanese tsunami, the economy is in free fall, and radiation is still lingering in the air and water. It now appears that the beleaguered nation’s GDP shrank at a 4% rate, in line with my own expectations, but far worse than anyone else’s. The down leg of the “V” is well underway. So when does the up leg begin, and when should we start positioning for it?
One needs to look no further than Toyota Motor’s (TM) stunning year-on-year decline in domestic sales of -69%. Consumers in the US want to buy its fuel-efficient cars, but sought-after models are in short supply.
Power shortages have been a major headache, and additional nuclear shutdowns have exacerbated the problem. A 28-week, $60 billion buying spree of Japanese stocks has ground to a halt, taking the Nikkei down 10%.
The government has already passed two supplementary budgets to get reconstruction underway, one for $50 billion and a second for $125 billion. The Bank of Japan has carried out quantitative easing worth $500 billion; nearly triple the Federal Reserve’s own recent QE2 efforts on a per-capita basis.
Surging loan demand indicates that these efforts are yielding their desired results. Companies are moving away from their famous kamban “just in time” inventory system toward a “just in case” model that provides a bigger buffer against unanticipated disasters. This is a net positive for the economy.
This monster stimulus is expected to deliver GDP growth in 2012 as high as 3%, taking it to the top of the pack of developed nations. That will prompt a rally of at least 20% in the Japanese stock market.
What’s more, widening interest rate differentials between Japan and the US should finally start to weaken the yen, giving a further boost to the economy and to stocks. This burst in business activity should also enable the country to flip from chronic deflation to inflation, and it will knock the wind out of Japanese government bonds, now yielding a pitiful 1.11% for the ten-year.
So when do we pull the trigger? If my theory is correct and we get a multi month “risk-off” trade that deflates all asset prices, then you want to hold off for now. But I can see a final bottoming of prices sometime this summer. The easy play here is to buy the iShares MSCI Japan Index Fund (EWJ).
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The next level of commitment includes the four Japanese blue chip stocks: Toyota Motor (TM), Nissan Motors (NSANY), Canon (CAJ), and Komatsu (KMTUY).
Keep in mind that it’s a good idea to hedge your currency risk here through buying puts on the CurrencyShares Japanese Yen Trust (FXY), as a weak yen will be part of a winning recipe.
See related: Get Ready for Carry Trade 2.0
By John Thomas
John Thomas can be found at The Mad Hedge Fund Trader. This article also appeared on Minyanville, a MoneyShow.com content partner.
