Japan's economy has experienced a brisk recovery under Prime Minister Shinzo Abe's watch, with the Japanese yen returning to a normalized valuation, Nikkei 225 trading up nearly 30% over the past three months, and record profits at many large companies. These trends are also likely to continue under BOJ governor Haruhiko Kuroda, who promised to double the country's monetary base and holdings of Japanese government bonds with a 2% inflation target.
After the Japanese yen spiked in late-2008 due to its status as a safe-haven, many Japanese companies saw profits deteriorate and began cutting costs to the bone. The yen's return to a normalized valuation has helped restore profitability at these firms, while the low cost structure has translated to big improvements on the bottom line. For instance, Toyota Motor Co. (NYSE: TM) recently reported a 13.5% increase in U.S. sales and a 23% bump to its profits.
Where to Find Opportunities
Investors looking to capitalize on these trends have many options, including broad exchange-traded funds like the iShares MSCI Japan Index ETF (NYSE: EWJ). These ETFs offer diverisifed exposure across Japan's entire economy in a single U.S.-traded security. Those interested in smaller companies may also consider ETFs like the WisdomTree Japan SmallCap Dividend Fund (NYSE: DFJ) as an alternative with greater growth potential than large caps.
Over the long run, many studies have shown that small-cap stocks tend to outperform large-cap stocks during bullish economic cycles. The U.S. stock market saw its Russell 2000 index outperform the S&P 500 index by 2% in 2012, while analysts like Merrill Lynch's Steven DeSanctis expect small-caps to return more than 20% in 2013. These same trends may come into play in Japan, where the economic recovery is even more pronounced.
Finally, there are a select few U.S. companies focused on Japan. For instance, Kinbasha Gaming International (OTCQX: KNBA) is the first and only SEC-reporting company with a majority of its operations in Japan to list on the OTCQX. With over $90 million in annualized revenue, the company is a leading operator of pachinko parlors - Japan's leading leisure activity - employing over 1,000 people in 21 locations throughout the country.
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Gaming Sector Catalysts
Shinzo Abe's Abenomics has not only helped improve corporate profits by returning the Japanese yen to normalized valuation, but these higher profits are also flowing down to Japanese personal incomes. Japanese household spending surged last month to its fastest rate in nine years, while the jobless rate fell to the lowest in more than four years. Spending surged a real 5.2% in March in price-adjusted real terms, according to official documents.
Small public companies like Kinbasha Gaming International (OTCQX: KNBA), which are focused on Japan's enormous pachinko industry, could also benefit from these trends. Since they were first introduced in the 1920s, pachinko has grown to become Japan's most popular leisure activity. The government estimates annual pachinko and pachislot gross wagers to be close to $378 billion per year, creating an enormous opportunity for operators in the space.
With their plans to pursue a consolidation strategy within the industry, Kinbasha Gaming International (OTCQX: KNBA) is well positioned within the industry. Japan's economic recovery under Shinzo Abe's Abenomics has helped improve consumer incomes and spending, which could translate to higher gaming revenues over time. As a result, the stock may be worth a second look for western investors seeking exposure to Japan's economic growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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