Japanese Stocks in the "House of Pain" (EWJ, ITF, VPL)

After Friday's sell-off in Tokyo I feel that the "house of pain" is the appropriate phrase to describe the current situation for Japanese stocks. Among all Japanese stocks with ADRs listed on the NYSE (NYX) or NASDAQ (NDAQ) only two managed to gain, doing so nicely. Keep reading for my analysis and the best and worst performers.

There are a number of factors at play putting downward pressure on Japanese stocks. The biggest issue right now has to be the strong yen which I last saw at Y109.5/US$1. After the big sell-off overnight in Tokyo that sent the Nikkei 225 Stock Average down -1.54% and as much as -2.61% intra-day, the exchange rate is about the only place foreign investors in Japan can find solace (that is unless your short Japan).

If you haven't read my post from yesterday covering Morgan Stanley's Japan Equity Strategy now might be a good time to do so.

Short-term I am somewhat bearish on Japan but see good trading opportunities and potentially good bargain shopping chances if there is more selling. The volatility in Japanese stocks and the yen is far from over. Just wait until this fall when PM Koizumi steps down. Long-term I remain bullish on Japan and am continuing the "buy on dips and hold" approach.

Note that although the rise in the yen is limiting losses for ADRs and Japan ETFs, it is not ideal. If you are long Japan what you wanted to see was a rise in the indices or individual stocks with a "weak" yen followed later by a strengthening yen. Now however, let's say Japanese stocks take off again during the second-half or even the last quarter but the yen weakens, then you won't see as much of a gain. Nearly the exact same thing happened last year as the yen weakened as Japanese stocks surged limiting overall gains for ADR and ETF investors.

Best:
(% change and closing price of ordinary shares)

Kirin Brewery (KNBWY) +7.55% closed at 1,909 yen

JP Morgan (JPM) upgraded Kirin from "neutral" to "overweight" after Kirin's earnings release yesterday and its accompanying corporate vision 2015 to takeover wholly Kirin Beverage (Tokyo: 2595) and become a holding company in summer 2007. JPM likes the focus on long-term growth. [Source: newratings.com]

Mizuho Securities also upgraded Kirin to a "2" which is a "buy" and the second highest rating it issues. No details are available regarding what it was previously rated and the specific reasons for the upgrade, although it seems obvious analysts like the new strategic vision at Kirin.

Canon Inc (CAJ) +2.0% closed at 8,670 yen

Canon was bought on the news of its planned 3:2 share split and full-year dividend increase. The market was also receptive to the official announcement of Uchida replacing Mitarai as President. Read details of all this here.

Worst:
(% change and closing price of ordinary shares)

NEC Corp (NIPNY) -4.88% closed at 741 yen, Reaction to horrible earnings but note the positive guidance

Advantest Corp (ATE) -4.16% closed at 12,210 yen

Kubota Corp (KUB) -3.57% closed at 1,243 yen

Trend Micro (TMIC) -3.15% closed at 4,310 yen

Sanyo Electric (SANYY) -2.78% closed at 280 yen

Toyota Motor Corp (TM) -2.60% closed at 6,370 yen

Matsushita Electric Industrial (MC) -2.43% closed at 2,605 yen

Hitachi Ltd (HIT) -2.30% closed at 807 yen

Millea Holdings (MLEA) -2.21% closed at 2,210,000 yen

Sony Corp (SNE) -2.20% closed at 5,330 yen

NTT (NTT) -2.03% closed at 532,000 yen Down ahead of earnings