Why Japan is Still Hot

It took IAMGOLD Corp. (IAG) shares exactly 6 months to reach my target price of $9.50. So on Wednesday I liquidated my positions in this up and coming gold miner, locking in gains of 21%. I believe, this stock will continue to go up with the price of gold significantly over time. However, as gold hits record levels, short term risks of holding IAG now outweigh potential rewards. I will be looking to reenter this position once the gold rally takes a breather. In the meantime, I used proceeds from this sale to get into Japan, in the form of iShares MSCI Japan (EWJ), which I purchased at $13.78.

EWJ is an exchange traded index fund of large Japanese stocks. Japanese stocks have been range bound over the past two years and Yen / US$ exchange rates have moved in a rather narrow range, as well. EWJ shares denominated in $US reflect these facts. Of course, there are good reasons why Yen has steadily depreciated along with the $US over the past two years. Near 0% interest rates, slow moving economy and negative population growth are certainly among factors that have limited demand for Yen. And with stock markets elsewhere in the world going gangbusters it is no wonder that Japanese have not been too eager to invest at home. Investors from other parts of the world contribute to this trend by originating Yen denominated low interest loans, converting proceeds to other currencies and investing them elsewhere for higher yields.

With all this on the proverbial Japanese plate, why bother investing there? There are actually a few good reasons. In the past quarter, Japanese currency began decoupling from the US$, appreciating 8% since June. Luckily, during the same time the NIKKEI average lost 10%. This makes for a great opportunity for US based investors to get in on the $ denominated EWJ at a price level below June's, purchasing a basket of sale priced Japanese stocks. In addition, while the Japanese economy is not the hottest one in the world at the moment, it is in far better shape than the US. (For example, Japan does not have outrageous trade and budget deficits.) And going into the Japanese stock market is certainly a safer way to diversify away from the $US than by buying into the volatile and overinflated BRIC stocks.

Yes, perhaps there are still good stocks to be had in Germany, Italy or Switzerland now, but there is also much more currency and market correction risk. As Euro and Swiss Frank have appreciated 15% -20% over the past two years, Yen did not! As European stock market indices appreciated more than 50% over the past two years, Japanese did not! So, what do you think will happen when the overheated markets in Europe and US correct? That's right, a whole hell of a lot of folks will try to cut their losses and either pay off those low interest loans in Japan or, who knows, perhaps, even drop a few billion Yen into the Japanese stock market. In any case, Japan currently offers the biggest bang for the buck and the best hedging opportunity in case hot markets elsewhere lose steam. And who knows, we may be in the middle of a correction already...

Disclosure: Author has a long position in EWJ

Comments

[goatfarmer]

Taiwan too. EWT.