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Japan has been one of the worst places you could have invested your money over the last five, 10, and 20 years. Some people, including Japan’s Prime Minister Taro Aso, think that is about to change.
Last week, Aso vowed to boost Japan’s annual economic growth to 2 percent by early 2011. “By the second half of fiscal 2010, we will achieve an annual growth rate of 2 percent,” Aso said.
Aso also promised to create 2 million jobs within three years, to increase household incomes by $10,000 a year, and that Japan would lead the world in per capita income.
But it won’t be an easy task.
I say that because the Bank of Japan (the Japanese Fed) is forecasting that the Japanese economy will shrink by 3.4 percent this year.
The signs of a recovery, or so-called “green shoots,” are slowly starting to materialize. That’s important because a country’s stock market typically takes off 6-12 months ahead of an economic turnaround.
Here’s what’s happening in the Japanese economy.
Green Shoot #1: Rising Industrial Output. Japanese manufacturers increased production for a fourth month in a row in June, capping the largest quarterly output expansion in more than 50 years.
In the second quarter, the country’s output climbed 8.3 percent compared to the previous quarter, making it the biggest quarter-on-quarter increase since 1953.
China’s $585 billion of stimulus spending has helped demand for Japanese cars, construction equipment and steel.
Green Shoot #2: Rising Steel Demand. Nippon Steel Corporation, Japan’s largest steel producer, is going to re-start two mothballed furnaces at its Oita plant in southern Japan and will increase output of crude steel by 40 percent in the July-September quarter.
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| Government stimulus measures are boosting profits of Japanese car makers. |
Green Shoot #3: Better-Than-Expected Car Profits. Honda and Mitsubishi, the second- and third-largest car makers in Japan, jumped on last week after they delivered better-than-expected profits.
Government stimulus measures from the United States, Germany, Japan and China — tax credits and tax subsidies for trading in an old car for a new fuel-efficient model — are boosting demand.
Green Shoot #4: Smaller-Than-Expected Sony Loss. Sony lost a lot of money in the second quarter — 37 billion yen ($400 million) but that was way, way less than the $109 billion loss the Manhattan experts were expecting.
Sony expects business to get a lot better though. “We are keeping our official forecast but internally we are aiming to at least break even,” Sony CFO Nobuyuki Oneda said.
Electronic competitors Fujitsu, Sanyo, NEC Corp, Mitsubishi Electric, and Sharp also delivered improved results.
Green Shoot #5: IMF Raises Forecast. The International Monetary Fund raised its outlook for Japan, raising its 2009 forecast from -6.2 percent to -6.0 percent and from 0.5 percent to 1.7 percent in 2010.
An important part of that optimism is the big trading business Japan does with China, who the IMF expects to grow by 7.5 percent.
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| The Nikkei hit a 10-month high at the end of July. |
Green Shoot #6: Nikkei on the Move. As I said at the top of this article, stock market gains typically precede economic recovery. If that’s true, the rise of the 225-issue Nikkei Stock Average to a 10-month high at the end of July is a very encouraging sign.
I have to admit that I think it is a little too early to jump into Japan. I only own one Japanese stock, Komatsu (KMTUY), in Asia Stock Alert but I’m getting close to adding more.
If you’d like to add some Japanese spice to your portfolio, there are many options. I’m more of a stock picker, and there are dozens of Japanese stocks traded right here on the New York Stock Exchange and the Nasdaq.
Here are some stocks to consider:
Advantest Corp. (ATE) makes and markets semiconductors and component test system products.
Canon Inc. (CAJ) makes copying machines, printers, and cameras.
Hitachi Ltd. (HIT) is a large IT, telecommunication systems, and electronics conglomerate.
Honda (HMC) makes and sells cars, motorcycles, and watercraft.
Konami (KNM) is a producer of video games.
Kubota (KUB) makes and markets farm equipment, construction machinery, engines, pipes, and valves.
Kyocera (KYO) manufactures and markets telecommunications equipment, electronics, solar energy products, and industrial ceramics.
Mitsubishi UFJ Financial Group (MTU) is the largest bank in the world with over 250 subsidiaries.
Mizuho Financial Group (MFG) is a large bank holding company which is also involved in investment banking.
Nidec (NJ) makes and sells motors, machinery, and electronic components.
Nippon Telegraph & Telephone (NTT) is Japan’s largest telecommunications company.
Nomura Holdings (NMR) is a provider of investment advisory, investment banking and merchant banking services.
NTT DoCoMo (DCM) is a provider of wireless and cellular telecommunications services.
ORIX (IX) is a provider of financial services for businesses.
Sony Corp. (SNE) is a huge electronics, game and entertainment conglomerate.
TDK Corp. (TDK) makes and markets recording media and recording device products.
Toyota (TM) is a famous manufacturer of cars, trucks and buses.
And if you’re more of an ETF investor, there are 13 Japan-focused ETFs to choose from. The easiest, most popular is the iShares MSCI Japan Index Fund (EWJ) but take a close look at SPDR Russell/Nomura Small Cap Japan ETF (JSC), too.
Regards,
Tony
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