Time to trade Japan

The cover of Barron’s magazine this week is telling investors that it is time to invest in Japan...we beg to differ.

The world has been riveted to the media this past week by Japan's tragedies and the Mideast civil war. Stocks have been pummelled as investors struggle to assess the effects on Japan's economy and energy prices. While it is clear that markets overreact to events like this, Japan is mired in a major depression and it does not seem to matter what they do, they have not been able to get out of it.

The population in Japan has peaked and economic momentum is anemic as the governments are drowning in debt. The Nikkei 225 remains some 75% below its 1989 high, so why is now the time to invest? We agree that it might be the time for a trade, but Japan’s problem run deep and we do not expect them to be solved anytime soon.

Barron’s suggests Japan's economy is almost certain to slow this year (Duh!). But the slowdown is likely to be only temporary, with a healthy growth forecast for next year as the country rebuilds. The average stock in Japan is selling now for 13.9 times its annual profit. Japanese stocks haven't been this cheap since the financial crisis—stocks are cheap there because deflation remains a major problem. No amount of quantitative easing has helped over the past 15 years or is likely to help—now that is temporary and adds to the longer-term debt problems.

We agree that the market is cheap and the recent slide means that some of the best companies in the world are available at low prices, but the yen is expensive. These stocks are likely to rebound 10% over the next few months—but that will not even recover the post earthquake losses.

Barron’s likes Sony (SNE-N) and Canon (CAJ-N); Toyota Motor (TM-N) and Nissan; cosmetics company Shiseido; telecom powers KDDI and Nippon Telegraph & Telephone (NTT-N); trading titans Mitsubishi, Sumitomo and Itochu; and steel giants JFE Holdings and Nippon Steel.

For Canadians, the best way to play it rather than throwing darts at a bunch of Japanese ADR’s in New York is by way of the Claymore CJP ETF (CJP-T). There are a few other ways to play it, by way of US$ holdings, but these have higher currency risks. With the yen the most expensive in history to the US$, the Claymore CJP is the way to go.

Japanese US$ Exchange-Traded Funds

• EWJ iShares MSCI Japan Index
• DXJ WisdomTree Japan Hedged Equity  
• DFJ WisdomTree Japan SmallCap Dividend 
• ITF iShares S&P/Topix 150 Index 
• JSC SPDR Russell/Nomura Small Cap Japan 
• SCJ iShares MSCI Japan Small Cap Index 
• JPP SPDR Russell/Nomura PRIME Japan

The other way to play Japan is on a tangent via the nuclear sector. We bought the Global X Uranium ETF (URA-N) for clients who have exposure to our global resource ETF strategy last week. This is probably the best way to play the recovery in the nuclear sector ...we need it and it is not likely going away. Expect it to be volatile for a while longer; it may not be for everyone.