How To Trade The Rebound In Japanese Stocks

Includes: EWJ, FXY, HMC, NSANF, TM
by: BubbleBustInvesting

Investors paying too much attention to Wall Street have probably missed a rebound in the Nikkei 225. Driven by a weakening yen and positive momentum in the U.S. and European markets, the index gained close to 2 percent overnight; and close to 30 percent since November, trading above 11,000 for first time in the last five years - still long way from its all time high back in 1989.

(Click to enlarge)

Is this rebound for real? If newly elected Prime Minister Shinzo Abe has the Bank of Japan print enough yen to pull the economy out of deflation, the answer is yes -- the rally may have legs. But how can investors benefit from this trend?

Here are three trades investors may want to consider:

1.Short the Japanese Currency Yen Trust (FXY) -- the fund is already down 5.13 Year To Date, close to 13 percent in the last three months, and 17 percent for 1-year. However, we believe that the trend is just beginning, as Mr. Abe seems determined to have Bank of Japan print sufficient amount of yen to achieve the 2 percent inflation he promised during the election campaign. But there is one more factor that makes this trde a compelling bet: Japan's heavy debt load (Debt/GDP is north of 250), which creates the possibility of a Greek-style crisis that will fuel a run on the yen.

Trailing Returns (%) Vs. Category
Return FXY (Mkt) FXY (NAV) Category* Index*
Year To Date -5.18 -5.29 1.90 0.51
1-Month -5.18 -5.29 0.27 0.03
3-Month -12.82 -12.50 -0.27 0.10
1-Year -17.00 -16.78 1.90 0.51
3-Year -0.85 -0.62 1.21 0.37
5-Year 2.69 2.81 0.77 1.18
* Category refers to Currency and Index refers to BofAML USD LIBOR 3 Mon CM

2. Buy iShares MSCI Japan Index Fund (NYSEARCA:EWJ) -- a diversified fund that invests in the major stocks that are included in the MSCI Japan Index. The fund pays 1.38 percent dividend and has a low expense ratio of 0.53; it is up 2.26 percent Year To Date and 11.27 percent over the last three months. We believe that the index has still room to climb as long as the yen continues to fall and the world economy continues to recover.

Trailing Returns (%) Vs. Category
Return EWJ (Mkt) EWJ Category* Index*
Year To Date 2.26 3.63 7.81 5.27
1-Month 2.26 3.63 5.05 5.27
3-Month 11.27 11.45 5.62 11.27
1-Year 6.59 6.87 7.81 17.25
3-Year 2.28 2.29 3.40 6.94
5-Year -3.24 -3.20 -2.58 -0.79
* Category refers to Japan Stock and Index refers to MSCI EAFE NR USD


3. Buy the stocks of companies that will benefit from the weak yen like Toyota (TM), Honda (NYSE:HMC), and Nissan (OTCPK:NSANF). I particularly like Toyota, which raised its sales forecast after reporting solid Q4 results.


Forward PE

Operating Margins

Qtrly Revenue Growth

Qtrly Earnings growth



6.27 %








Ford (NYSE:F)





General Motors (NYSE:GM)





Toyota enjoys a number of strengths and opportunities: A large scale that allows it to command the highest margins in the automobile industry; economies of scope that allows the company to cater to different market segments, including the luxury Lexus line. Toyota further enjoys a strong brand name; and a big presence in emerging markets, including China, where there is plenty of room for further growth.

At the same time, Toyota faces a number of weakness and threats: Its competitive advantage is sensitive to currency fluctuations, especially the yen-dollar rate; and its sales are sensitive to world economic growth. Toyota is further vulnerable to competition from domestic and overseas automakers; while its China growth is vulnerable to the China-Japan territorial conflict.

A few words of caution: Driven by a massive QE, Japan's low yen policy may run counter to QE of other country's, most notably the US, leading to a currency war that will hurt global trade. That's certainly not a good scenario for Toyota, which relies greatly on exports for its sales growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in FXY over 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.