Why Now Is the Time to Invest in the Land of the Rising Sun

There has been a tremendous focus on the Japanese economy and the Japanese yen since former Prime Minster Shinzo Abe regained power in December. Most of the attention has been on his determination to break the back of deflation, which has been a decades-long problem in Japan.

He has openly lobbied, and in some cases threatened, the Bank of Japan (BOJ) to adopt a 2 percent inflation target over the coming years, doubling the current 1 percent target. He also recently announced plans for a massive stimulus program that will focus on continued rebuilding after last year’s tsunami disaster.

Earlier this week, at a much anticipated meeting, the BOJ bent to Mr. Abe’s pressure and formally increased its inflation target from 1 percent to 2 percent. Additionally, it announced it will unleash its own unlimited quantitative easing program when the current QE program expires at the end of 2013.

Anticipation of the BOJ’s moves has led to a steep decline in the Japanese yen and a strong rally in Japanese stocks, over the past several months.

But while most of the press headlines were on the BOJ meeting this week, something else happened that is …

Another Bullish Factor
for Japanese Stocks

Since about the middle of last year, Japan and China have been in a heated dispute over the Senkaku Islands — a group of uninhabited islands in the East China Sea. The dispute got so heated that earlier this year Japanese companies temporarily shut down facilities in China, fearing anti-Japanese vandalism. And exports to China from Japan have declined as a result of the tension.

This week Japanese Prime Minster Abe sent a letter to various Chinese officials suggesting the two sides de-escalate the fighting and leave the issue to future generations. While not a complete olive branch, it does represent a step in the right direction … not just for political stability, but also for Japan’s economy and exporters. China is Japan’s largest customer, so relieving tension between the two countries is an economic positive for Japanese companies.

Central bank stimulus, a lower yen, and decreased tension with China should
mean a good 2013 for Japanese companies and their stockholders.

Combine that with the recently depressed yen and forthcoming government stimulus programs, and the outlook for Japanese shares is looking more positive despite the fact that the aforementioned 2 percent inflation target from the BOJ is now fully priced in the market.

Based on extreme expansionary monetary policies alone, the Japanese stock market was poised to see a continued rally throughout 2013, as the weaker yen boosts export revenues for large Japanese companies. But relieving tensions over the Senkaku Islands also increases the potential for renewed demand of Japanese products. And is yet another feather in the Japan bull’s cap.

One way to play Japan is via the Wisdom Tree Hedged Japan Fund (DXJ), which is one of the holdings in our Million-Dollar Contrarian Portfolio and is up almost 17 percent since we bought it late last year.

This ETF provides exposure to Japanese stocks while at the same time hedging out any adverse effect of a continued fall in the Japanese yen.

Japan has long been a hole into which investors have thrown good capital. But times appear to be changing in the land of the rising sun, and Japanese shares are poised to potentially see a significant rebound in 2013.

Best,

Tom