Daily Gains Letter

Japan the Next Big Trade for U.S. Investors?

By for Daily Gains Letter |

U.S. InvestorsThe central bank of Japan has taken center stage when it comes to using extraordinary measures to revive growth in an economy. In an effort to boost the Japanese economy, the central bank has resorted to quantitative easing. And unlike the U.S. Federal Reserve, Japan is also involved in buying exchange-traded funds (ETFs) and real estate investment trusts (REITs), not just government bonds and mortgage securities.

Unfortunately, the central bank is outright failing. One of the main goals of the Bank of Japan is to inject inflation into the Japanese economy through money printing, aiming for an inflation rate of two percent. Sadly, this isn’t happening; inflation in the Japanese economy is running far below the targeted level, and there may not even be light at the end of the tunnel.

“A 1 percent inflation rate may be possible, but that’s different to the Bank of Japan target,” said Takahiro Mitani, manager of the Government Pension Investment Fund of Japan (GPIF), the world’s largest pension fund. “We haven’t seen real demand to pull prices up yet. Whether inflation will be stable is questionable.” (Source: Winkler, M., “World’s Biggest Pension Fund Sees Japan Fail on 2% Inflation,” Bloomberg web site, December 4, 2013.)

Consumption is one of the factors that can help bring inflation into an economy. Sadly, the Japanese economy is seeing hardships here as well, as consumer confidence, one of the best indicators of where consumer spending will go, is declining. Between September and November, consumer confidence in the Japanese economy declined more than eight percent. The index tracking consumer confidence stood at 45.7 in September and 41.9 in November. (Source: “Consumer Confidence Survey,” Cabinet Office of Japan web site, last accessed December 10, 2013.)

Misery in the Japanese economy doesn’t just end here, as there seems to be a slowdown in the business activity as well. The Tertiary Industry Activity declined 0.7% in October from a month earlier, to 99.6 from 100.3. (Source: “Indices of Tertiary Industry Activity,” Japanese Ministry of Economy, Trade and Industry web site, December 10, 2013.)

Looking at all this, I will not be surprised to see the Bank of Japan continue to do what it has been doing—printing more money and buying government bonds and other securities. As a result of this, and from what we have seen in the past, the Japanese yen will eventually decline further in value compared to other major currencies in the global economy, and Japanese stocks will increase in value.

Investors can take advantage of this situation by shorting ETFs like the CurrencyShares Japanese Yen Trust (NYSE/FXY), which tracks the performance of the Japanese yen, or by buying MAXIS Nikkei 225 Index ETF (NYSE/NKY), which tracks the main stock market in the Japanese economy.

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