Japan Makes A Mockery Of The Stock Market

Includes: DXJ, EWJ, FXY, GLD, SLV
by: The Financial Lexicon

The recent statement by Japan's economic and fiscal policy minister, Akira Amari, about wanting to see the Nikkei reach 13,000 by the end of March is quite an eye-opener, although not a shocker. From my perspective, the explicit price target makes a mockery of investing in stocks, will surely drive even more traders into Japanese stocks, and will do nothing to improve the lives of the majority of Japan's citizens. Yes, Japanese stocks can rise on a nominal basis. But Japan should take a lesson from the United States of recent years. A rising stock market does not, in itself, beget well-paying, full-time jobs. A rising stock market combined with a relentless weakening of the currency (happening of late in Japan) does, however, have a history of making life more expensive for everyday people. And when the currency in question is fiat, and voracious foreign traders looking to make money by shorting the daylights out of a currency are jumping on the bandwagon, history has not been kind to the everyday people who use that fiat currency. Japan is playing with fire.

I will at least give the Japanese government credit for being open and honest about what they are attempting to accomplish with the currency and stocks. I have a hunch there are many investors worldwide who would appreciate that type of honesty from other central banks. Japan's leaders are now quite explicit in expressing their desires for a weakening currency and rising stock prices. By doing so, the country is upping the ante in the race to debase fiat currencies and increase nominal wealth.

What does this mean for investors? If you are the type of investor or trader who enjoys being whipsawed by the latest whims of politicians, Japan is the new United States. Some ETFs you should consider trading are the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ), the iShares MSCI Japan ETF (NYSEARCA:EWJ), and the CurrencyShares Japanese Yen Trust (NYSEARCA:FXY). But Japanese citizens reading this should strongly consider buying real assets. Gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) are just two of many examples. I know that gold and silver have not, in U.S. dollar terms, been performing that well in recent months. With that said, if you are buying gold and silver as a store of value, you should view the recent weak performance as a gift. People who own gold and silver truly as stores of value will care very little about the daily, weekly, and monthly fiat currency movements of the metals. Instead, the metals are owned for those times in history when those in power mismanage a fiat currency to an extent that a new monetary regime comes about.

If Japan's attempt at raising nominal stock prices fails, I have a hard time imagining one ends up losing more money in gold or silver over the next decade than one would lose in Japanese stocks. Why might it fail? Politicians may see the price of goods and services soar as the weakening currency helps to drive stock prices, in addition to other prices, higher. This may scare politicians into reversing course. Or if those in power don't reverse course, the electorate may decide to vote into power a different party that will reverse course.

And if the attempt at raising stock prices succeeds, it will likely cause Japanese politicians to raise the price target again, and then again, until the situation eventually spirals out of control and the Nikkei truly becomes nothing more than a means for foreigners to speculate on the destruction on Japan's fiat currency regime. This has happened before in history (in other countries) and will most likely happen again (somewhere, and at some point). Especially if you are a younger Japanese investor, you need to ask yourself whether you think the current monetary regime in Japan will outlive you. Japan's fiscal situation is a complete mess. Printing money and the "wealth effect" of nominal stock market gains has never before, as far as I am aware, solved a debt mess the size of Japan's. Whatever the endgame is for Japan, the actions of recent months have, in my opinion, only brought forward the date of the eventual outcome.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long gold and silver.