Donald Trump’s election is having profound ripple effects across the global economy.
Japan is among the early beneficiaries of the president’s policies.
The Land of the Rising Sun recently enjoyed a healthy uptick in GDP, which makes its government debt far less frightening.
Political stability also looks likely going forward.
A weakening yen helps Japan’s exporters, too.
Add it all up and now is the perfect time to diversify into the Japanese market.
After all, it’s still selling at half its level of 27 years ago.
I asked my senior analyst, Martin Hutchinson, to reveal his top five bullish forces on Japan.
Hutch’s full analysis is below.
Ahead of the tape,
Bullish Force #1: Robotics
Japan’s robotics industry is the world leader, in terms of share of GDP, with over 250,000 robots currently in operation.
The country is uniquely accepting of robots among global cultures, with a robot-loving tradition that goes all the way back to the 1920s.
Consequently, robots are used in such areas as elder care, where they would not yet be accepted in the West.
Japan thus has a “first mover” advantage in what seems likely to be a seminal technology of the 21st century.
Bullish Force #2: Good Value
Japan’s benchmark — the Nikkei index — sits around 19,000, compared with its all-time high of 38,916 set on Dec. 29, 1989. So Japanese stocks presently trade for roughly half their 1989 level.
That means you don’t have to worry about buying overpriced assets.
It also means that the market has plenty of upside ahead.
Bullish Force #3: Real Growth
Japan’s economy is finally growing efficiently, with fourth-quarter real GDP 1.2% above the previous year.
Now, bear in mind that Japan’s population is shrinking, so growth figures per capita are higher than raw growth figures.
Expect the uptrend to continue, too, as this quarter is expected to be the fifth successive quarter of GDP growth — the longest such streak since 2006.
With Japan’s capital expenditure up 2% over the previous quarter, I expect more investment-led growth ahead.
Bullish Force #4: Inflation
Global inflation is trending upward, with rates in the EU and the United States both above their central banks’ targets of 2%.
Higher inflation is good news for Japan, whose inflation is also firmly positive.
Together with the higher real growth, inflation reduces the danger posed by the government’s debt burden, which sits around 250% of GDP.
With inflation and real growth both working together, if the government avoids any more foolish spending “stimulus,” Japan’s debt problem can finally be solved.
Bullish Force #5: Shinzō Abe
Abe can now run for a third term as leader of the LDP, potentially giving him another four years in office.
Japan’s revolving-door leadership has been one of its main problems. That is, because it promotes short-termism and waste in policymaking.
Junichiro Koizumi (2001–06) was well on the way to solving Japan’s problems by cutting government spending until he was forced out of office after only five years.
With another four years in office, Abe is incentivized to pursue sound policies that will produce long-term, stable economic recovery and debt reduction.
Conclusion: Diversify Into Japanese Stocks
Having disappointed for decades, Japan is finally getting its mojo back.
Sure, we could buy into Japan’s prospects by investing in one of its blue chip companies, mostly major exporters, or buy a broad market index.
However, I prefer to focus on the small-cap sector of the Japanese economy.
Smaller companies are less likely to be burdened by the mistakes of the past and should produce the main winners from a period of economic recovery.
The Japan Smaller Capitalization Closed Fund (NYSE:JOF) is a $300 million closed-end fund run by Nomura Securities (Japan’s largest investment bank) that invests at least 80% of its assets in Japanese small-caps.
As a closed-end fund, not an ETF, it’s actively managed and benefits from Nomura’s deep knowledge of Japan’s domestic markets.
It’s also trading at a mouthwatering 12% discount to net asset value, which means that you’re buying $1 of assets for only $0.88.