Japan for Sale, Yen by Yen

• Gloom and doom prognostications notwithstanding, the latest OECD economic survey concludes that the US economy is slowing but not sliding into recession. In the OECD’s view, the Fed rate cuts have helped the US economy dodge the subprime bullet to date, despite the specter of a “Minsky Meltdown” where a spreading asset deflation drags the economy into recession.
• While global equity markets have been synchronized for some time now and it will take years for Asia to truly decouple from the U.S., the OECD forecasts imply that the global economy (as expressed by the projected growth in world trade) is not only doing just fine, but could accelerate going into 2008.
• The latter remains a strong reason to maintain exposure to basic industry/commodity/BRICs-related stocks, particularly for Japanese stocks.
• While we have become despondent about any government policy or corporate governance initiatives that could trigger a major foreign investor reappraisal of Japan’s growth potential, the strongest case for Japanese equities is that, a) the economy continues to muddle along largely unaffected by the US subprime debacle, b) the ECB and the BOJ will have to forget about raising interest rates for next year, and c) Japanese stocks are looking increasingly cheap in foreign investor eyes.
• Rather than the yen racing past JPY100/US$ as currency traders continue to hope for, we continue to believe that the yen needs to depreciate significantly further?i.e., to JPY130/US$ or weaker, so that Japanese assets become a screaming buy relative to European, Asian or even US assets.
• Takeover bids in Japan have surged in 2007 by some 70% YoY, and are currently being driven by foreign capital as well as domestic industry consolidation. Oil money and sovereign wealth funds are also on the hunt for attractive Japanese assets, as evidenced by Dubai International Capital’s big stake in Sony. We seen particular potential for direct capital inflows into Japan’s smaller J-REITs, which have recently bottomed following a massive 48% sell-off.

Disclosure: No Positions