One of the biggest surprises in these waning days of 2012 has been the robust rally in the Nikkei 225 Index (NKY). Japan’s incoming Prime Minister Shinzo Abe has promised to light a fire under the economy with a massive fiscal effort and pressure the Bank of Japan to set a 2% inflation target and accelerate bond buying. The Nikkei broke through the 10,000 mark in early trading on December 19 in Tokyo and is up about 10% on the year. (The chart below reflects the Nikkei’s December 18 close.)
^N225 data by YCharts
Yes, the Nikkei is light years from its December 29, 1989, bubble-era high of 38,915. The strong yen remains a worry. So does Japan’s world-class debt mess, now clocking in at about 220% of GDP. And Japan’s rapidly aging population suggests the world’s third biggest economy won’t be in the fast lane anytime soon.
Even so, a number of prominent analysts see better times ahead for Japan and its stock market. James Hunt of Tocqueville Asset Management in a recent note to clients points out that over the last 12 years, Japanese corporate profits, cash flow and return on equity have all increased even as stock prices have stagnated. As a result, “[t]he price to earnings ratio for profitable Nikkei 225 companies has gone from 24x to 15x, while the price/book value has compressed from 1.7x to 1.1x and the dividend yield has increased from 0.8% to 2.3%.”
Singapore-based investor Jim Rogers argues that with the Nikkei trading in the same range as it did in 1983, Japanese stocks are a bargain—at least for the next couple of years. He recommends looking for Japanese stocks that can serve as a proxy play for China and other faster growing economies in Asia. Given Japan’s massive debt problems, though, he suggests a hasty exit in the middle of this decade.
If you want to invest in Japan, this helpful post from SmartMoney puts forth some ETF picks. Here are two the magazine suggests: The iShares MSCI Japan Index ETF (EWJ) and the SPDR Russell/Nomura Small Cap Japan ETF (JSC).
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