For contrarians, a crisis can bring opportunities

This week marks the one-year anniversary of the tsunami hitting Japan and the Fukushima nuclear meltdown. Undoubtedly the country is still healing from the effects of those disasters. But recent data has shown a recovery might be underway that could provide opportunities for contrarian investors.

The Japanese government has taken tremendous steps, starting with huge infrastructure spending and loan guarantees put in place immediately following the tsunami, that are designed to help rebuild the Tohoku region. While those measures have helped the country recover and GDP growth turn positive, the Japanese economy has been hit by another powerful force …

A Strong Japanese Yen

Despite the aftermath from the tsunami and nuclear disaster, investors plowed into the Japanese yen in the fall of 2011 as fears of a European crisis spread. This presented another major problem for Japanese officials trying to get the economy back on its feet.

Exports are a huge portion of Japan’s economy. And a stronger yen makes those exports more expensive to foreign buyers in China, the United States, and Europe. A higher yen coupled with cautious buyers in those countries led Japanese exports to fall throughout the end of 2011.

The Bank of Japan (BOJ), however, has recently become very proactive in fighting the rising yen. It started back in November when the BOJ actively sold yen in the open market against a basket of currencies to push the value of their currency lower. That was followed by the surprise announcement last month that they would be increasing their quantitative easing program by 10 trillion yen — boosting it to 30 trillion yen.

These measures seem to be having an effect. The yen is down nearly 7 percent so far in 2012 versus the U.S. dollar.

Yen vs. dollar 2012

And the Nikkei stock index is the second best performing major market in the world, rising over 17 percent year-to-date.

Nikkei index year to date

As we look forward, the prospects of a lower yen, along with more stimulus and infrastructure spending, bode well for the Japanese economy and market in the medium term. Two ways you can potentially play those moves are with the ProShares Ultra Short Yen ETF (YCS) and the iShares MSCI Japanese Index Fund (EWJ).

As we remember the terrible tragedy that struck Japan one year ago, let’s also look to the future. And given the tremendous government intervention, perhaps Japan is finally recovering from the tsunami and nuclear disaster.

Best,

Tom