Is Now (Finally) the Time to Invest in Japan?

How you can invest in the Japanese recovery.

Japan's stock market is hot right now.

There is a very good chance that you currently have no exposure to one of the hottest stock markets in the world. No, it's not the US stock market where year-to-date the S&P 500 is only up about 4%. Nor is it the Chinese stock market, which has had an insane roller coaster ride this year.  It is the Japanese stock market, which measured by the Nikkei 225, has returned 19% so far this year. 

For most Americans it can be unnerving to invest outside of the good ole' USA - and for a number of reasons that is understandable.

 

In addition to cultural differences about how stocks are viewed, there are different reporting and regulatory issues that seem foreign - no pun intended - opposed to how things are done here at home. 

But perhaps the biggest reason that American investors shy away from foreign stock markets like Japan is that their stocks generally are not prone to the explosive moves that you can see daily in the US. To put it bluntly, foreign stocks are exotic, but not sexy, to US investors. 

But that may be about to change. 

The fallout from the 2008 financial crisis has forced many Japanese companies to reevaluate how they do business.  For example, Japanese companies have traditionally carried very little debt on their books compared to their counterparts in the US and Europe.  Although that trait helped them weather the fiscal storm, their performance post-crisis has dramatically lagged overseas counterparts.

 

Why?  Because low debt is a double edged sword.  Effective use of debt can fuel growth and supercharge ROI, in turn driving profits and share price. Japanese companies have signaled in the past few years that they are now more willing to put debt to use. 

Another catalyst is a new set of regulations put in place last year related to corporate governance, aimed at giving shareholders of public companies more say so.

 The new rules are being viewed favorably by Japan's large pension funds who are shedding their bond holdings and more aggressively moving into equities.  This type of rising tide can float a lot of boats. 

Finally, many Japanese companies have a median workforce age just south of 60, the retirement age in Japan.  As these workers retire, costs should go down and employee counts should drop, allowing for more efficient use of their labor force courtesy of recent innovations in technology.  For the first time in Japan's history "running lean" may be standard operating procedure for their traditionally bloated corporations. 

So how can you benefit?  Well, there are a number of different ways. 

The easiest, and certainly the most macro, way would be to buy the iShares Japan ETF (EWJ) which aims to track the performance of the MSCI Index.  The fund consists mostly of stocks that trade on the Tokyo Stock Exchange and includes large, mid, and small cap stocks. 

Another way would be to buy the American Depository Receipt (ADR) of Japanese stocks.  These include some of the most well-known companies in the world like Toyota Motor Corporation (TM), Sony (SNE), Mitsubishi Financial (MTU), and Canon (CAJ).

 

These ADR's are exchange listed and trade just like any other stock. 

Photo Credits: Yoshio Tomii/Photolibrary/Getty Images