Japan: A Time for Brave Investors

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Includes: EWJ, VPL
by: Larry MacDonald

“Japan appears to be losing control of its nuclear crisis after fresh explosions at an atomic plant north of Tokyo released more radiation into the air…” said an article this morning on the website of the Financial Times of London. It’s indeed looking quite dire, as confirmed by the 10% collapse in the Nikkei 225 on Tuesday (Japanese time), which follows a 6% plunge on Monday and a 2% drop on Friday.

I posted Friday on how well regional stock markets recovered in the aftermath of the 2005 earthquake-tsunami to hit Indonesia. The Japanese situation is now moving toward a nuclear catastrophe, which suggests a more severe disaster – yet also a greater potential for stock-market recovery (from a deeper low).

The Bank of Japan has announced a massive increase in monetary stimulus. The Japanese government will be announcing a massive fiscal response to rebuild and keep the economy going. Along with the sharp drop in Japanese stocks, investors could be on the cusp of a rare opportunity to buy low. I plan a two-phase entry: half of the position today, with the other half committed if and when the worse case scenario (complete meltdown) arises.

Some may object to speaking about the potential for investment gains at a time like this. I could understand that logic if was leveled against the short sellers who are profiting from the human misery. But going long on Japanese securities should be viewed as being supportive of the Japanese people, in my opinion.

Prior to the extreme calamity, sentiment was on the upswing and money was flowing into Japanese stocks. The view seemed to be that the Nikkei presented relatively good value since it had not participated as much in the run-up in global stock markets over the past 2 years. There was also a feeling the central bank would maintain its easy policy longer than other central banks. Now we have even greater values and a “tsunami of stimulus” coming.

The main exchange-traded funds for Japanese stocks are the iShares MSCI Japan Index Fund (NYSEARCA:EWJ) and Vanguard Pacific (NYSEARCA:VPL). For Canadians, the Claymore Japan Fundamental Index ETF — C$ Hedged (CJP) could fit the bill. The hedging imposes extra costs but it avoids the hefty currency fees incurred when buying U.S. dollars in an investment account. Moreover, it is very likely the Bank of Japan will be actively pursuing yen devaluation for some time.

If you do decide to buy an ETF, be careful about buying in the first and last half hour of the trading session. ETF pricing can go haywire at such times, with large premiums or discounts emerging temporarily.

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