Japan Still Rising

By Aaron Levitt | August 03, 2011 AAA

It's been four months since Japan was rocked by its earthquake and tsunami. The resulting nuclear and humanitarian disaster saw the Nikkei 225 index, Japan's Dow, plunge more that 14%. This was the largest drop for the Nikkei since Black Monday in 1987. Since the quake hit, the resiliency of the Japanese people has been shown. In just four months, factory outputs are getting back to normal and reconstruction activity has begun. While other developed nations have begun to show signs of slowing, economic reports from Japan have turned positive. With situation in Japan beginning to be resolved, those global investors with a tilt towards value may want to consider the land of the rising sun.

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Still Opportunities
Since hitting its lows back in March, Japanese equities have flourished. Broad measures of the Japanese stock market have climbed over 3% in the last 30 days, while the popular developed market iShares MSCI EAFE Index (NYSE:EFA) has fallen by about 5%. History is on Japan's side and these gains could continue. Analysts at Bespoke Investment Research report that, following the 1995 Kobe Earthquake and resulting 25% drop in the Nikkei, Japanese stocks eclipsed those loses and actually ended the year higher.

Economic data seems to provide some credence to higher prices for Japanese equities. The nation's industrial output data for May showed an increase of 6.2% and its export-to-import ratio improved more than forecasts predicted in June. A survey of business conditions within the nation have also turned positive. Several major automotive manufacturers, including Toyota (NYSE:TM) and Nissan (OTCBB:NSANY), have posted improving production numbers and earthquake hit factories have resumed assembly. In addition, Japanese lawmakers have approved an additional 2 trillion yen or about $25.5 billion worth of additional funds to help pay for reconstruction. This stimulus should help boost the nation's economy in the short to medium term.

Finally, despite the recent outperformance, Japanese equities still remain incredibly cheap. Companies within the nation have some of the strongest balance sheets in the world, with many owning substantial excess assets. P/E ratios for stocks in the nation are currently hovering at levels not seen since the 1970s, and remain well below their 1989 peak. Small-caps in Japan are among the cheapest in the world and even the Japanese real estate market is proving tempting after a 19 year decline.

Investing In the Recovery
Japan could be the ultimate recovery story and value proposition. While the number of Japanese based mutual funds has stalled, adding exposure could be one of the best plays of the year. The iShares MSCI Japan Index (NYSE:EWJ) and iShares S&P/TOPIX 150 Index (NYSE:ITF) offer two of the broadest ways to add large cap exposure and hold the bulk of the assets in the space.

As the recovery in Japan continues, investors may want to take advantage of cheapness and rise in small-caps. The WisdomTree Japan Small-Cap Dividend (NYSE:DFJ) and SPDR Russell/Nomura Small Cap Japan (NYSE:JSC) can be used to gain access, while the new IQ Japan Mid Cap ETF (Nasdaq:RSUN) allows investors to tap into the often ignored, but faster-moving, mid-cap sector of the nation.

Finally, for investors looking for individual picks for the Japanese market, financial firm Mitsubishi UFJ Financial (NYSE:MTU) and sogo shosha Mitsui & Co (OTCBB:MITSY) make ideal picks. At Mitsubishi, customer deposits represent over two-thirds of its total assets and it has avoided many of the problems brought on by the financial crisis. The company has been buying weaker rivals, and purchased a stake in Morgan Stanley (NYSE:MS). Holding interests in everything from copper mines and food production to energy and industrial assets, Mitsui is an infrastructure and private equity stock rolled into one.

Bottom Line
In months following Japan's massive earthquake and humanitarian disaster, the nation is a beacon of strength. Factory outputs have begun to rise and equity prices has followed suit. However, the nation still represents a great value proposition going forward. For investors, adding a dose of Japan might do a world of good in the up and coming year. The previous picks along with companies like Kubota (NYSE:KUB) make ideal selections. (These decision-making tools play an integral role in corporate finance and economic forecasting. See Using Decision Trees In Finance.)

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