How to Make Money in Japan's Market …

I spend so much time crowing about great investing opportunities in Asia that I’m worried you may think stock market profits are practically guaranteed.

Nothing could be further from the truth. Just like you can find some great companies to own in the United States despite our recession, there are some parts of Asia that you shouldn’t touch with a 10-foot pole.

One of those places is Japan, which is still mired in a deflationary spiral and decades-long recession. Connecting the economic dots from Japan reveals a very dismal picture.

Sayonara #1: Toyota falls flat on its face. If you listened to my video update from Saturday, you heard my take on the dismal quarterly profit (or absence of profit) from Toyota. After 77 years of globe-leading dominance, General Motors surrendered its #1 status to Toyota earlier this year. That #1 market share title, however, hasn’t helped Toyota make any money.

Toyota lost almost $2 billion more than General Motors in the most-recent quarter.

• Toyota lost a mind-numbing $7.7 BILLION dollars in the last 90 days. To put that into perspective, the fools running General Motors only lost $5.9 billion during the same time. Business is pretty bad when you lose $1.8 billion more than General Motors.

• Toyota slashed its dividend by 30 percent (the first time in 15 years), warned that auto sales would fall by another 14 percent and profits by 12 percent in the next 12 months. Toyota now expects to lose another $5.5 billion during that time.

• Standard & Poor’s chopped its rating on Toyota debt from AAA to AA and slapped a “negative” outlook on it.

Sayonara #2: Nintendo’s sales skid in Japan. Kids, mine included, still play more Nintendo than they should, but aren’t spending as much money as they used to on video games.

Nintendo is projecting essentially flat revenue growth in 2009, but warned that its profits would fall by 12 percent this year.

The problem isn’t from American teenagers but from Japanese ones. For the year ending in March 2009, Nintendo sold 2.06 million Wii units in Japan, a 47 percent year-on-year drop from the 3.9 million it sold the previous year.

I shouldn’t pick on just Nintendo. Japanese retail sales fell by 3.9 percent in March, the seventh consecutive. That was on the heels of a 5.7 percent drop in February, steepest pace of decline since February 2002.

And to add insult to injury, Sony sold more PS3 consoles than Nintendo sold Wiis for two months in a row. Sony sold 108,530 units to Nintendo’s 67,116.

Sayonara #3: Hitachi sees no profits in sight. Hitachi is one of the largest electronics companies in the world, so it knows a thing or two about consumer demand. And it doesn’t like what it sees.

Hitachi expects an $8 billion loss this fiscal year.

Hitachi upped its loss forecast for the year ending March 31 to $8 billion. Sometimes numbers are so huge that they are hard to put into perspective, but that $8 billion loss is going to be the biggest loss in the history of Japanese manufacturers.

And Hitachi expects it to take a long time for business to rebound. So long that it is going to completely write-off its accumulated tax loss carry forwards. Deferred tax losses are the right to reduce future taxes by using previous losses against current profits.

The problem is that you need to have profits in order to use those old loses.

Even Japan’s own central bank, the Bank of Japan, admitted that the Japanese economy is likely to continue to deteriorate through the end of 2009.

Japan’s problem is the same as the Chinese exporters: Cash-strapped, job-losing, house-falling, credit-crushed Americans just aren’t buying what they are selling.

If you are an Asian exporter counting on the U.S. to buy your products, you’re in big trouble.

My view: If you’re long Japanese stocks, use rallies to get out of them.

If you want to aim for some nice profits from the next decline in Japan’s Nikkei, there are several mutual funds and ETFs that are designed to make money as the Japanese stock market falls, such as the ProShares UltraShort MSCI Japan (EWV) or ProFunds UltraShort Japan (UKPIX).

Regards,

Tony

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