Japan's Market Is Looking Up

Includes: EWJ, NKY, SNE
by: Mary Daniel

Japan's market took a nose dive following last year's earthquake and nuclear disaster. But Japanese stocks may already be poised for a comeback. Consumer spending is already improving and corporate earnings are expected to rise 69% this year. Currently, Japan's equities are the most expensive among the world's 60 biggest markets. The Nikkei 225 is up 35% since March 2009. Policy makers in Japan have committed to spend 20 trillion yen to rebuild and spur economic growth. Also, the Bank of Japan pledged in April to continue adding monetary stimulus.

However, Japan still faces a shrinking population and the world's highest debt burden. Some worry that the Nikkei has come too far too fast and that the economy will not be able to keep up. The strength of the Japanese yen may be slowing the economic recovery as well. A higher yen makes Japanese products more expensive abroad, thus slowing exports. Both Sony (NYSE: SNE) and Sharp have combined annual losses of 900 billion yen. There are signs, however, that the rise of the yen may be slowing. This will boost exports and increase earnings for Japanese corporations.

The MAXIS Nikkei 225 Index ETF (AMEX: NKY) tracks the Nikkei 225 closely. NKY also maintains a close relationship to Japan's currency, the yen. This will be something to watch as Japan slowly gets back into the swing of things. It has shown some volatility recently. However, it is up since the onset of 2012. The iShares MSCI Japan Index (AMEX: EWJ) includes automotive, pharmaceutical, financial, and electronics companies in its top holdings. Although recent months have seen a decline, this fund is also up since the beginning of the year.

The high price-to-earnings ratio of Japanese stocks indicates investors' confidence. The cautiousness with which investors eyed Japan after the quake is gone. The high inflation rates will subside also along with the slowing of the yen's growth. These things will act together to revive Japan's economy. Japan may currently be maintaining a slow economic pace, but things are looking up for this Asian country.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.