We stick with our "Strong Sell" on the Japanese market - despite current euphoria.
Markets were in denial for nearly two years concerning the extent of Fed Funds hikes. So when we went out on a limb back in June 2004 warning of Fed Funds reaching "around 6% around 2006" we got courteous giggles. And when the market finally accepted this reality in May, those giggles turned to worries.
A similar denial mode is brewing regarding Japan. The optimists reckon with growth as far as one can see. We reckon with a nasty shock - one that is triggered once the market moves out of denial.
Here are some scarier facts that optimists at least may wish to heed:
* Base money, the "dough" out of which money supplies are made, is contracting sharply, implying less liquidity.
* The last time that the Bank of Japan raised its overnight rate, 17th August 2000, the economy and thus market tanked.
* The last two times that the government raised consumption tax - it was introduced in 1989 and raised in April 1997 - the economy and thus market tanked.
Here is a gloomy outlook:
* Mr. Kaoru Yosano, Minister for Economic and Fiscal Policy, reckons that once Mr. Koizumi is replaced this September, Japan's will to reform will ebb. Markets won't like that.
* Mr. Sadakazu Tanigaki, Finance Minister, wants to double the consumption tax, bringing it up to 10%.
* The probable new PM, Mr. Shinzo Abe, wants Japan to flex its military muscles more especially concerning North Korea. That worries us civilians, and of course begets even more defence spending.
How can an economy and thus profits thrive in an atmosphere of higher rates, much higher taxes and a military threat? Look at how the Middle East is unnerving markets! Watch Japan's Economic Time ™ deteriorate, hurting markets worldwide.
Money-saving implication: Avoid Japan!
Editor's note: Funds/ETFs covering Japan include EWJ, ITF, JEQ and JOF.