Investing in Japan: Two Ways to Play Its Stock Market Revival

by Alexander Green, Chief Investment Strategist
Monday, February 8, 2010: Issue #1192

Here’s a handy way to know when to sell your investments: everyone is talking about them.

There is an obvious corollary to knowing what to sell. If you want to know what to buy, consider what no one is talking about.

And that brings me to investing in Japan…

Investing in Japan: Land of the Rising Sun And Stock Market

From a high near 40,000 in 1989, the once-mighty Nikkei 225 – the equivalent of our S&P 500 – fell over 80% and hit a 27-year low early last year. It’s still more than 70% below the highs of 21 years ago.

The main culprit – aside from a real estate bubble that made the one here in the United States look bush-league – was misguided government policies. Japan waited too long to clean up its ailing banking system and spent trillions on public works projects that simply weren’t needed.

However, Japan has a new government that has promised to shrink the country’s massive bureaucracy and cut wasteful public spending. It also intends to end more than 20 years of economic stagnation by cutting taxes and focusing on small and mid-sized businesses.

Japanese stocks have rallied off the lows of 10 months ago. In fact, the Tokyo Exchange is one of the world’s best-performing bourses so far in 2010.

But it’s still among the cheapest and most unloved in the world. Virtually no one is enthusiastic about Japanese stocks.

And that’s excellent news…

Two Ways to Invest in Japan’s Economic Revival

Great opportunities are born when dirt-cheap valuations are married to investor disgust or apathy. And there are a number of good reasons to put money to work in Japan right now…

  • A New Political and Economic Philosophy: Just as Ronald Reagan’s free-market policies ignited one of the great bull markets of the twentieth century, Japan stands at the threshold of a new era.
  • Consumer Cash: Japanese consumers and investors are flush with cash. Having largely ignored domestic stocks after years of sub-par returns, the Tokyo market should lift off as that money begins to find its way out of mattresses and back into Japanese equities.
  • Institutional Involvement: For years, global fund managers have outperformed the world benchmark simply by underweighting Japan. But if the bullet train takes off without them, they will be forced to dash after it.

If you want to invest in Japanese companies directly, there are plenty of Japanese ADRs (American Depository Receipts) available on the New York Stock Exchange.

But if you’re looking for a quick way to gain access to this market, consider these two ETFs…

  • iShares MSCI Japan Index (NYSE: EWJ) for large-cap stocks.
  • WisdomTree Japan SmallCap Dividend Fund (NYSE: DFJ) for smaller companies.

Both offer exceptional upside potential in the months ahead. And then, of course, investors will start talking about them.

Good investing,

Alexander Green