A Potentially Lucrative Investment Opportunity in Japan

Let’s be honest. Normally, the average stock trader isn’t much concerned with what’s going on with the yen or Japan for that matter. There are plenty of domestic stocks that don’t require you to have in-depth knowledge of a country that sits on the other side of the world but there might be an investment in this story. Here’s a little background to get you started.

Over the past couple of decades, Japan has felt like the country that can’t win. It went through some rough times but then entered a period of growth. Just when the country seemed to be back on its feet, the country was brought to its economic knees when stock and property prices plunged. (Sound familiar?)

The Japanese government did what the U.S. did and embarked on quantitative easing. Once the program ended, the economy, once again, began to sink prompting the program to be reinstated. Things got better and then came the massive earthquake, tsunami, and nuclear meltdown.

Newly re-elected Prime Minister, Shinzō Abe is taking the, “go big or go home” approach to what has become a deflationary economy. More QE but on a massive scale. David Houle, a Certified Financial Analyst with Season Investments says, “Japan has embarked on a quantitative easing program that is three times the size of ours when measured relative to the size of the economy. Their intent is to spark mild but stable inflation and economy growth. One of the impacts is a weaker currency”

And it’s an impact that the Japanese government endorses. A weaker currency, in theory, lowers the cost of Japanese exports which should increase demand. This should breathe life into the economy just as it has in the U.S.

If you’ve watched the financial media lately, you know that the weakening yen has been the currency story du jour and while some believe that Japan will soon put the breaks on the weakening yen, many still believe that there’s money to be made.

One way is to continue shorting the yen. Another is to go long Japanese companies. Examples include Honda HON, Sony SNE, and Toyota TM. We aren’t recommending these to buy but instead, to get your research started.

Finally, an ETF. One like the WisdomTree Japan Hedged Equity Fund DXJ or ProShares UltraShort Yen YCS if you’re looking for a levered play. (Warning: Levered ETFs can be extremely volatile. Use with caution.)

Finally, the Japan story, much like in the United States, is likely to be a multi-year opportunity. If QE does for Japan’s markets what it has done for the United States, a long-term investing strategy appropriately balanced in your portfolio could be lucrative.

Disclosure: At the time of this writing, Tim Parker had no position in any of the products listed.