For deep-rooted value investors buying what's hated and ignored is the name of the game. Sometimes waiting decades for an idea to pan out, these investors are willing to go against the grain to find great long term buys. Perhaps, the most hated and ignored country could be Japan. Overall, the nation has been viewed, by many investors, as one of the most unfavorable markets for at least 20 years, ever since the 1980s crash and resulting crippling deflation. Stocks in the nation remain stuck in neutral and Japan's high debt continues to be a sticking point. However, the situation in the former Asian superstar could be changing. For investors, Japan may be finally at a turning point.
SEE: Dragons, Samurai Warriors, and Sushi on Wall Street.
Better Times Ahead
For the better half of twenty years, Japanese equities have been "dead money." After a huge boom and bust cycle resulting from a real estate crash, the country has just plodded along. However, things may finally be changing for the beleaguered island nation.
Seen as a reserve currency, the Yen has continued to act as a safe haven during the economic crisis. A strong currency is a major issue if your economy is based on exports. However, there may be signs that the yen's strength is ebbing. So far this year the currency has fallen about 8.7% versus a basket of nine developed-nation peers, and a survey by Bloomberg predicts that it will fall an additional 3% by the end of the year.
That's big news, considering Japan's dominance across a variety of high tech sectors, outside of consumer electronics. The nation is seeing big demand across the rest of emerging Asia, including China, for its renewable energy applications, infrastructure and pollution remediation equipment. Any drop in the year will make these value-added high-tech goods more desirable and boost revenues at Japanese producers.
SEE: Should You Invest in Emerging Markets?
Additionally, Japanese firms have gone on a buying spree with regards to international firms. Last year Japanese firms spent $93 billion on foreign businesses. So far this year they've spent an additional $18 billion on external acquisitions. As the yen continues to fall and these earnings are repatriated back into Japan, the result is larger profits.
Finally, the nation may be seeing the start of another housing boom. The government has extended tax breaks for mortgage payments, and made it easier to buy with a low deposit. According to Credit Suisse (NYSE:CS), new mortgages grew in 2011 for the first time since 2007. Furthermore, around 15% of Japan's population falls between the ages of 35 and 44 - that's the sweet-spot for homeownership.
Adding a Dose of Japanese Equities
Most broad-based international funds, like the iShares MSCI EAFE Index (ARCA:EFA), include a large weighting to Japan, but given the nation's deep value prospects, it may be a good idea to add some additional exposure. The iShares MSCI Japan Index (ARCA:EWJ) still remains the easiest way to add direct exposure. The fund tracks 311 different Japanese firms, including exporters like Takeda Pharmaceuticals (OTCBB:TKPYY) and heavy machinery firm Kubota (NYSE:KUB). The fund charges 0.51% in expenses and could see its fortunes rise as the yen falls. Similarly, the MAXIS Nikkei 225 Index ETF (ARCA:NKY) can be used a broad Japan play.
For more direct exposure to Japan's exporting muscle could be the various sogo shosha's. These trading houses have their hands in everything from commodities and infrastructure projects, to heavy manufacturing. Both Sumitomo Corporation (OTCBB:SSUMY) and Mitsui & Co (OTCBB:MITSY) are two of the biggest and could be great long term buys.
Finally, any boosts to the economy caused by housing could mean that it's time for small-cap exposure. Both the SPDR Russell/Nomura Small Cap Japan (ARCA:JSC) and WisdomTree Japan SmallCap Dividend ETF (ARCA:DFJ) offer exposure to Japan's domestic economy. The SPDR fund offers a broad take on the theme, while the WisdomTree fund hones in on high dividend payers in the region.
SEE: What Are SPDR ETFs?
The Bottom Line
While Japan has been called dead money for years, a falling yen could finally mean the nation is turning a corner. For investors, it may be time to bet on the exporting superstar. The previous picks along with the iShares S&P/TOPIX 150 Index (ARCA:ITF) make ideal selections to play the nation's pending turn around.
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