Ignore the sceptics – it’s time to buy Japan

We’ve been bullish on Japan at MoneyWeek for quite some time.

So I’ll accept that I’m hardly a neutral observer when it comes to the fortunes of the Japanese stock market. But I think this latest bull run has long legs.

In fact, I think there’s a good chance that the Nikkei 225, currently at around 11,400, could be challenging the 13,000 level by the end of March.

How can I be so specific?

Well, because Japan’s economy minister himself told me…

Everything is looking up for Japan

At the weekend, Japan’s economy minister, Akira Amari, made an announcement that would have grabbed frenzied headlines had it happened in any other developed economy.

According to MarketWatch, he said: “It will be important to show our mettle to see the Nikkei reaches 13,000 points by the end of the fiscal year.” That’s 31 March. In other words, he’s aiming for a gain of around 15% in six weeks or so.

Can you imagine what would happen if US Federal Reserve head Ben Bernanke said that he’d been told to get the Dow Jones index up to 16,000 before the end of the first quarter? I suspect investors would take him at his word. They’ve been well trained by now. The Dow would get there by the end of next week.

But Japan has been in the doldrums for so long, that to many investors, it seems like wishful thinking at best. Yet another false dawn for a market and an economy that’s been guaranteed to disappoint for longer than many can remember.

And that’s probably the main reason why I like Japan so much right now.

All the fundamentals are lining up for Japan right now. The government has decided that it needs to have a weaker currency and higher inflation. And despite concerns that Japan would get a ticking off at the G20 meeting this week, it looks like the country will get a free pass.

The Americans have already effectively given Japan the green light. US Treasury official, Lael Brainard, said yesterday: “We support the effort to reinvigorate growth and to end deflation in Japan.” Her comments gave the yen another shove off the cliff. A dollar now buys more than 94 yen, from less than 80 a few short months ago.

As my colleague Merryn Somerset Webb noted recently, the US has every reason to want a strong Japan. It needs an ally to offset China’s growing power, and Japan is the most sensible option. So don’t expect too much mouthing off about ‘currency wars’ from that direction.

Same goes for Europe. The French might be squealing about the strength of the euro. But the Germans struck back yesterday, with Jens Widmann arguing that the euro is “not seriously overvalued”.

So the Japanese have a clear run at weakening the yen. And that’s good news for company earnings. According to Kazuhiro Miyake at Daiwa Securities, if the yen/dollar exchange rate averages 95 over 2013, then earnings per share for Japanese companies will hit near-record levels.

On top of this, Japan is cheap, which means even the prospect of Nikkei 13,000 is hardly market insanity.

The best thing about Japan – everyone still hates it

But the best thing about Japan is the sheer level of scepticism that remains in the market. Investors have got so used to ignoring Japan that despite its huge gains so far, that there’s still room for far more.

According to the most recent Merrill Lynch Bank of America fund manager survey, a net 3% of global fund managers are ‘overweight’ Japan. That’s a lot better than the massive ‘underweight’ seen the previous month, but it’s hardly a ringing endorsement.

This is a very healthy sign for Japan bulls. Very few markets do what you expect them to, when you expect them to do it. That’s why it pays to be a contrarian. Perhaps nowhere is this demonstrated more brutally than within the foreign exchange markets.

Just look at the performance of the euro last year. Everyone expected it to be demolished. It wasn’t. That single fact probably destroyed more hedge funds than any other market event last year (call it the petty revenge of the eurocrats).

So high levels of scepticism are good. It means there are plenty more bears left to turn bullish, which means there’s a lot of life left in a trend.

The Japanese government is serious. And investors will gradually wake up to that, as they see prime minister Shinzo Abe hammering home the inflation message, and corporate earnings in Japan picking up. In turn, the market will continue to rise, and more and more investors will panic about missing out. 

You know that old saying in the market – ‘Don’t fight the Fed’? Well, finally it applies to Japan too. There’ll be no more half-hearted attempts at inflation now. Expect the Japanese to go ‘the full Bernanke’ before this is all over.

Japan is cheap. Its government is determined to inflate the market and the economy. And despite the gains so far, investors are still worried about jumping on board.

Taken altogether, that’s a fantastic mix. In short, if you don’t already have exposure to Japan, I suggest you get some now. In our recent cover story on currency wars, we looked at some ways to buy in – if you’re not already a subscriber, you can get your first three issues free here.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • Banker

    So should I buy Japan because you say so??? Where is at list a grain of some undamentals in this article like p/e ratios, Book Value/price etc for the Japanese index you tipped to gain 15% in just over a month?

  • IJ

    Wow – at least you admit the bias, John. This economy minister gets off lightly indeed. Imagine how MW would react if Bernanke did say such a thing. Would it not prompt a stream of vitriolic articles filled with references to the man’s many failed attempts to manipulate markets and predict the future? Perhaps Bernanke doesn’t make such an extreme statement because he’s learnt that one risks serious embarrassment in so doing. Couple of other points. Does everyone really hate Japan that much? If so, why does it feature so regularly as a “contrarian” pick of market experts? And if there’s any doubt over the stock market, there is little doubt that the short yen trade is by now consensual, just as short Euro was last year. We saw how that panned out. Incidentally the Nikkei is flat ytd in Euro terms. Not so spectacular after all.

  • Boris

    Why would you get excited about Japan equities rising 15% in six weeks when the currency has fallen 17% in as many weeks? Is the currency going to hold steady now? Not from the sentiment expressed vis the Fed…

  • Roger

    Group of 7 leading economies warns on adverse effects of exchange rate volatility

  • Changing Man

    I have been pretty sceptical about Japan too having held a flatlining fund for several years until I got out after the Fukishima incident looked about to sink the country! I remember someone saying that no one ever made any money out of Japan and concluding that they were right! However today’s news from N Korea underlines how much the US need Japan on side. So I’m prepared to give them another chance. I am advancing on Japan with a 3-pronged attack, shorting the Yen against the Dollar, holding a gbp-hedged Japanese etf and a small company equity fund! Banzai!

  • Bapodra Investments

    If you want a leveraged play on Japan then one should be more daring and go for Japanese Smaller Companies. These should put in stellar performances over the next few years.

  • Bapodra Investments

    Just have a look at the performance on some of the Japanese Smaller Companies Funds out there and you will see that they have broken out to the upside and there is some momentum behind them. Don’t just take my word for it, check for yourselves. Japan is still the 3rd largest economy in the world and most of the downside has been priced into the market over the last few years so if Japan’s new Prime Minister does what he intends to then I can see there being an encouraging bull market in Japan. Even this anticipation alone will mean investors investing in Japan, speculators speculating in Japan, Hedge Funds going long Japan, Investments Banks…I will say no more. You all get the drift.

  • Roger

    According Chinese investment circles, as a capital equipment exporter, Japan has the same feature as Germany, its economy is not affected by exchange rate, but economic out look. That is why Germany is not too keen on Euro to go lower. By contrast, as a big importer, weakening Yen will cause serious inflation and reduce internal consumption. So the judge is out.

  • Roger

    Of course, as China is turning itself into a capital equipment exporter in machine tools and electronics (producing shoes is now the job for India and Vietnam), there is a severe competition between Korea, China and Japan. Who will win?

  • gamesinvestor

    Has it occurred to anyone that lowering the yen and stoking up inflation will exacerbate the debt loading in Japan?

    Is it such a good idea to stoke up inflation bringing in huge imported costs to the nation?

  • reddcarpdog

    Great call on Japan MW ! Having grown totally dissalusioned with Japan after many friutless years of having some exposure there ( and selling out just before thestart of the recent rally;-( )..I decided to give it another chance and invested in the Baillie Gifford IT as recommended by MW & MSW in particular…it’s up 23% since then :-) Cheers.

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