The Investment U E-Letter: Issue #560
Thursday, July 20, 2006 Investing In Japan: Still Bullish On the Land of the Rising Sun
By Alex Green, Advisory Panelist, Investment U
The news out of Tokyo has not been the best lately. So, has investing in Japan become a bad idea for investors?
In June we learned that Japan's version of the head of the Federal Reserve (Bank of Japan Governor) was invested in a hedge fund whose manager was arrested on charges of insider trading. Consumer spending, which makes up 55% of Japan's GDP, continues to sputter. And on July 5, the Tokyo market plunged over 3% after North Korea test-fired a barrage of missiles into the Sea of Japan. However, things are better than they look in the world's second-largest economy… The Bank of Japan's most closely watched business survey - the Tankan survey - paints a bright picture of corporate sentiment. In June, Japanese companies felt more optimistic about conditions, saying the business outlook is improving and corporate spending is likely to increase. And on Friday, July 14, Japan's central bank raised interest rates for the first time in six years, lifting its key rate to 0.25% from zero. This is positive news for Japanese equity investors. Why? Because it means that deflationary pressures are easing and Japanese economic growth is likely to keep rising. Already, unemployment is low at 4% and factories don't have much room to increase production. Machine orders are coming in above optimistic expectations. And bank lending is showing positive growth for the first time in eight years. Also, a new corporate law introduced this spring makes it easier for foreign firms to convince Japanese shareholders that a merger with them is in their best interest. Increased M&A activity bodes well for the market, too. History shows that when Tokyo enters a bull market, it can look like the Silver Spurs Rodeo. For example, if you invested $10,000 in the S&P 500 in 1970, two decades later it would have been worth over $76,000. Not bad. But the same amount invested in the Nikkei 225 would have turned into more than $600,000. Also, remember that Japan is still Asia's most advanced economy, with world-leading technology and unmatched infrastructure. The cost of doing business in Japan has decreased dramatically in recent years, too. Land prices, office rents and labor costs have come way down. So have taxes and tariffs. And the government has instituted serious banking reforms. The nation also sits on a mountain of personal financial assets - more than $100,000 for every man, woman and child. After a decade of negative stock market returns, most of this capital is sitting in low-yielding bank deposits. Even a small fraction of these assets returning to the equity market could give it a serious jolt. In short, we view the recent pullback in Tokyo as an opportunity for investing in Japan. Good trading, Alex Green Today's Investment U Cribsheet - The Oxford Club's portfolio contains three Japanese-related investments - one of which is up 78% since members bought shares three years ago. But it's the country's growth prospects that prompted Alex Green to recently tell members, "I'm going to suggest you keep right on buying." Learn more about The Oxford Club.
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