Investing in Japan: Why It's Still Worth It

Includes: BCS, EWJ, SMFJY
by: The Sovereign Society

By Eric Roseman

Over the last several years, investing in Japan has been a difficult exercise in patience.

Despite offering some of the best stock market values in the world accompanied by a cheap currency, Japanese stocks have posted some of the worst returns. But at some point, I believe patient investors will make a small fortune in this country, especially speculating on volatile small-cap stocks.

Historically, big bear markets for Japanese smaller companies have eventually rewarded contrarians with big triple-digit gains of 100% or more once the selling ended. I'm expecting this to happen over the next 12-24 months.

JSC Chart Another reason to be patient with Japan is the country's growing role as a distressed investor.

Japan, like most Asian countries, did not suffer significant sub-prime losses. Japanese banks have largely been conservative players on the world stage since crippling deflation in the early 1990s wiped-out a good chunk of shareholders' equity. Many banks have emerged largely unscathed from the ongoing global credit crunch and banks are armed with pools of cash collected from Japanese savers.

Last Friday, Sumitomo Mitsui Financial Group (OTC:SMFJY) agreed to inject US$925 million dollars into distressed British bank, Barclays plc (NYSE:BCS). Though the amount is small relative to Sovereign Wealth Funds, it's still part of a growing trend in Japan as banks expand their roles and accumulate distressed assets in Europe and the United States.

This marks a significant contrast to the 1980s. At the time, Japanese institutions loaded up on expensive California and New York real estate only to get burned when that "bubble" ended in 1989-1990.

Japan is one big contrarian value play. The market is extremely attractive from almost every valuations matrix and will lead major economy markets again in stock market performance. I just can't say when.

I'm making yet another trip to Tokyo later in September to learn more about this great country and the huge values in equity markets. Stay tuned!