Global Investment Watch

Every fortnight we will focus on the investment climate in an individual country.  Two weeks ago, we discussed Canada; today, we discuss Japan.


Higher Oil Prices Cloud an Otherwise Sunny Japan

This week, our country of focus is Japan.  While rising oil prices make the country less and less attractive, here at Guild Investment, we’re holding the country in the back of our minds as we wait for oil prices to fall.  When oil prices fall, we expect Japan to offer a very attractive investment climate.

Everyone is Down on Japan

1)      Japan is no longer the 2nd largest economy, since China’s surpassed it recently

2)      The Government seems ineffectual, and Japanese companies are strongly condemning the government for letting the yen rise, thus decreasing Japan’s competitiveness

3)      Japan’s huge debt burden; some global credit rating agencies have already downgraded Japan’s debt

4)      Japan has been in an economic malaise for more than twenty years

Despite all this, we see the potential for the long-term future of stocks in the “Land of the Rising Sun”.  In a few years, we anticipate our bullish approach to Japanese stocks.

Today however, Japan has many bears, and very few bulls.  We like that, and in our in-depth research, we’ve noticed it is not all bad for investors.

Here are some of the main points we’ve noticed:

1) The global economy is in a recovery, which means that interest rates will rise in Europe and U.S. before they rise in Japan.  The Japanese central bank has made it clear that they will remain accommodative, keeping interest rates low and actually may increase purchases of Japanese government bonds.  In other words, it means more QE in Japan, and more QE means more liquidity—and rising stock prices.  It also means a lower yen which should start to help Japanese exports.

2) The global economy is strengthening and Japan will sell many machines, autos, electronics, and other high-value-added products to Europe, Asia, and the U.S.

3) Due to global growth creating an economic rising tide, all boats are being raised, even Japan’s.

4) Finally, there has been a change in policy-making at the top.  Japan appears to be more open to new styles of functioning in order to boost exports, such as lowering corporate tax rates. The country is also pursuing more free trade agreements with its neighbors, many of which are experiencing rapidly-rising inflation…and a decline in their previous cost savings.

5) Japan still has a very vibrant technology sector benefitting from the global population’s desire to become better connected, informed, and entertained.

It is true they must have political support to enact substantive change, but Japan is starting to change politically.  The country has been known for its distinct traditional values and holding back from adopting Western employment policies; in Japan, seniority is still king.

However, the country will have to face their major demographic challenges by promoting the employment of women, the promotion of younger workers, and by raising the retirement age.  Japan has a low birth rate, so fewer younger citizens will have to support more of the elderly.  The Japanese are thinking more clearly with respect to their role in Asia, pursuing free trade more aggressively, lowering corporate tax rates, lowering the value of the yen, all of which are good for their exports, and good for their stocks.

We believe that as the yen starts to weaken in value, Japanese exports will once again become more attractive.

 A risk to Japan that has always existed is that their dependence imported energy.  If they were to be cut off from Middle Eastern oil, or if the price of oil goes up to $150 per barrel as we anticipate, the Japanese economy would be hurt. Our recommendation for Japan is only after oil prices begin their descent some months in the future.  This effect will be seen in not only Japan, but in many markets across the globe.  Here at Guild Investment Management believe that higher oil prices will make most stock markets unattractive for, at least, the next few months.