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team Graham Parlane

Japan Stocks and Mr Abe - an Opportunity?

Posted by Graham Parlane on 16 January 2013

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I have profiled (ad nauseam) the potential for JPY weakness over the last 6 months of last year with good effect as the USD/JPY rose from 77.00 to 90.00 and the NZD/JPY from 58.00 to 75.00 in the same period.

What I haven’t done is document the opportunity for very large rises in Japanese stocks.

The real speed of the JPY move has come as the market came to understand that former PM Abe would once again hold power, pledging to learn from his previous mistakes as PM and essentially do the opposite (monetary policy wise) to his last tenure. Mr Abe says that in 2006 he mistakenly backed the BOJ when they raised interest rates. Following that decision the Nikkei stock index fell by half and the JPY appreciated by 40% against the USD.

Now Mr Abe is back at the helm and with his pledge to enforce a 2.0% inflation target on the BOJ, and the measures they’ll need to implement to achieve that will have to be nothing short of extraordinary. Indeed, one analyst I have come to respect, says Abe’s program will be like Bernanke’s but ‘on steroids’ !

Now to understand the potential for Japanese stocks we need to look back a bit in history. In 1989 the Nikkei Index was close to 40,000 and only this month the Nikkei was languishing below 10,000…………………incredible that the valuation of Japan’s corporate sector is currently worth ¼ of what it was more the 20 years ago. Now that’s a bear market huh? Here is a chart back to 1963 (great year that by the way!)

Japan.IZ – Click here to view chart

Now the other chart that screams that Japanese stocks are absurdly cheap is the Price to Book ratio that shows that in 2011 (I couldn’t find a more up to date chart but I understand that ratio hasn’t changed much) the index as a whole was trading BELOW is net asset backing at 0.9 !

Japan’s Market Index – click here to view chart

So here’s the nib. Japan has a stock market that is super cheap (ridiculously so?) and now they have a government hell bent on cutting interest rates and printing money forcing investors back into stocks. That and the weakening JPY, which significantly helps the blue chip exporters, should see Japanese stocks much higher this year.

I’ll be spending the rest of this week looking for the best vehicles (financial instruments) to express this trade and will revert. For now I’ll buy a small amount of Nikkei and look to add a bigger amount on any dip.

Cheers G.

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