Korean Missile Launches Could Mean Buying Opportunity Ahead of Earnings (EWJ)

Everyone has probably heard about the six -- wait, now seven -- missile test launches by North Korea. It's a shame but a reality nonetheless that North Korea has to resort to such tactics to attract attention to itself and mistakenly try to improve its bargaining power. I was in Japan during the missile launch in 1998. The reaction this time at least by market participants is definitely more calm and cool.

If you are looking to add to or initiate a position in Japanese stocks, a dip caused by the launches might be an opportunity ahead of what's expected to be a good earnings reporting season.

After four straight days of positive finishes the Nikkei 225 Stock Average closed lower on Wednesday by 0.73%. Intra-day it traded lower by as much as 1.0%.

It's hard to say at this point if the missile launches will impact trading tomorrow in Japan. What we are seeing now is rhetoric from global leaders and those in the defense and intelligence community. Hopefully China's leadership will be able to smooth the situation as it seems to be taking a more active role. I'm not sure if economic sanctions against North Korea will have much meaning but they will/must be imposed in response to the launches.

The Bank of Japan will hold a rate decision meeting on July 13-14. I will be looking at adding to my position if there are further missile-related induced dips since I don't think that BoJ monetary policy from this meeting can negatively influence the market too much. In fact, I think a beginning of rate hikes at least initially has more of a psychological effect since you're effectively going from zero to .25. Maintaining the status quo ZIRP could actually spark a nice rally.

If you want a better understanding of North Korea's missile launch take a look at this op-ed (pdf format) by Prof. Daniel Pinkston of the Center for Nonproliferation Studies at the Monterey Institute. I had the pleasure of taking a course taught by Prof. Pinkston and found his take on North Korea to be most balanced and enlightening. Note that his op-ed was published in mid-June but his arguments are consistent and remain relevant. Look for forthcoming analysis of the launches on the Nonproliferation Studies center website.

iShares MSCI Japan Index ETF (EWJ) 1-year chart:

Comments

[Enzio von ...:]

I agree with Steve re. the reactions to NK's missile antics. But I was a little more alert when in today's press I read that Japan may go for a pre-emptive strike. We know how much confidence such pre-emptive strikes have created in the Muddle East! In my opinion, the real player is China, and the real issue is Taiwan....

2006 Jul 09 11:59 PM