Insights & Advice

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Japan: Is the sun beginning to rise?

Readers should know by now that I’m a contrarian. The worse things seem to get, the more interested I become. Take Japan for example.

Massive investment ahead

This island nation has suffered one economic bad spell after another for over twenty years. Japan is a depressing tale of economic and political mismanagement that has resulted in years of negative interest rates, a huge budget deficit, a stagnant economy, moribund stock market and a disillusioned and aging population. The massive earthquake and tsunami that triggered a nuclear disaster at a nuclear power plant in the eastern part of the country was seemingly the last straw that broke this country’s back.

Japan is now officially in recession, which started in the last quarter of 2010, and has both widened and deepened thanks to these calamities of nature. Faced with enormous rebuilding costs, any effort to reign in the government’s huge deficit looks hopeless. As a result, last week Moody’s Investors Services placed Japan’s government debt on review for a possible downgrade after changing its view in February from “stable” to “negative.”

So why am I interested in investing in a country faced with this unending list of woes?

After two decades of lackluster efforts to revive the domestic economy, a new approach has been forced on the nation’s leaders, thanks to the earthquake and tsunami. An enormous re-building of parts of the economy has to be undertaken, similar to the kind of reconstruction Japan undertook after WW II.  Experts estimate it will cost $200-$300 billion.

Japanese corporations need to increase their capital expenditures in order to regain lost capacity as well as to invest in improving their supply chain operations against a repeat of this kind of disaster. In addition, they will spend more money on earthquake proofing existing factories and office buildings and acquiring alternate power sources. This could add another $150-200 billion to national spending.

Aside from all the spending that is beginning in the near future, the government will maintain its extremely loose monetary policy. Interest rates will remain at 0 % for the foreseeable future. At the same time, the yen is expected to decline as investors shy away from bonds that are rated  “ negative”  by Moody’s and an economy that is in recession.

To my way of thinking, here is an economy that is on the eve of a massive stimulus program, a declining currency (good for increasing exports), a corporate sector hell bent on increasing capacity and re-gaining global market share ( think autos) and a population that is willing to finance the effort regardless of Moody’s outlook on their bonds. In the eastern region, new housing (unlike the U.S.) is in great demand. And unlike our own financial institutions that refuse to lend despite low interest rates, Japan’s banks will lend and lend to corporations and individuals in order to help the recovery effort.

What this indicates to me is that a “V” shaped economic recovery in Japan is a strong possibility. If I’m right, the stock market is a screaming buy.

Over the longer term this particular set of economic variables may actually pull the country out of its decade’s long deflationary quagmire. Japan as a nation needs to spend again, build again and buy again. Up until now, there hasn’t been the will or a really compelling reason to do so. Now, whether you call it divine intervention or simply the flip side of a bad set of circumstances, Japan has its mojo back. It may take a few years before all of the above unfolds, but I think we are on the cusp of dramatic change within this country. Remember, you heard it here first, folks.

Posted in A Few Dollars More, Portfolio Advice