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China & India vs. Japan: Where to Put Your Capital

April 04, 2012 | About:
Profit Confidential

Profit Confidential

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Making money in Japanese stocks continues to be a battle. Since the benchmark Nikkei 225 peaked in 1990 at just below 39,000, the price chart showed multiple failures to halt the downside trend. From 1992 to 2000, Japan tried to recover from its recession, but failed. The Nikkei 225 failed on five attempts to hold above 20,000 during this time. There was another attempt at 20,000 in 2007, but, again, it was a failure. The index is currently hovering at 10,000, down about 75% from its peak 22 years ago and investors clearly are not pleased.

Japanese stocks rallied in early 2011, but then the country was hit by the massive tsunami that not only killed thousands, but also delivered horrendous damage to buildings and the infrastructure, which to this day is still being rebuilt, albeit delayed by the radiation leakage.

The country continues to face struggles with its gross domestic product (GDP). In the fourth quarter of 2011, Japan’s GDP grew at a muted 0.6%, which is well below its historical average annual GDP growth rate of 2.15% from 1981 to 2011. Goldman Sachs estimates that Japan’s GDP will expand by 1.9% in 2012. The Organisation for Economic Co-operation and Development pegs Japan’s GDP growth at 2.0% in 2012, but has it declining to 1.6% in 2013.

At this point, there is minimal hope for Japan, as there are much better regions for investment opportunities globally, including China, India, and Latin America.

So, while Japan has faltered over the past three decades, China has used the opportunity to put its massive cheap labor workforce to use and created colossal manufacturing capacity for the world’s manufacturers looking for cheap labor and lower cost to produce goods.

China’s GDP leapfrogged ahead of Japan’s.

China’s mega-power economic GDP engine is showing some stalling, but the growth in the country continues to be well ahead of that of the rest of the G7 countries, as I discussed in Why the Great Wall of China’s Still Standing.

For 2012, China’s GDP is estimated to slow marginally to 8.6% from the previous 9.2%%, according to Goldman Sachs. This is impressive GDP growth compared to the industrialized world.

However, there are those who are positive towards Japan. Famed billionaire and investment guru Warren Buffett said the weakness in Japanese stocks provides a buying opportunity.

I’m just not that convinced. There are investment opportunities in Japan, but there is more money to be made elsewhere.

But if you really want some money in Japan, I suggest careful planning.

Several of the key Japanese banks, such as Mitsubishi UFJ Financial Group, Inc. (MTU) and Sumitomo Mitsui Financial Group, Inc. (SMFG), are interesting bank plays.

Other than the banks, you want to look at infrastructure stocks; not only in Japan, but also global companies operating in the U.S., such as Jacobs Engineering Group Inc. (EC) and Fluor Corporation (FLR).

The bottom line is that Japan remains a strong viable economic power, but you need to look to the emerging powers in China and India as better alternatives for above-average returns.


Rating: 3.5/5 (4 votes)

Comments

mcwillia
Mcwillia - 2 years ago


Japan's Wile-e-Coyote moment is not far off. 213% debt to GDP, financed at around 1.3%, which eats up 52% of the tax revenues. The slightest rise in rates will put the government into insolvency and trigger a yen run on printing fears, a consequent JGB crash, and a banking system failure, which will dry up all credit and implode the economy and stock market. Could a more negative probable outcome exist for a country? The Japanese Ministry of Finance admits it...see their own debt-bomb chart here (rather unbelievable that a country would publish something like this about themselves). _http://www.mof.go.jp/english/budget/budget/fy2012/e20111224b.pdf

Sumitomo MFG and Mitsubishi UFJ will very possibly default and get nationalized, unless their trading companies pull them through, so they are probably not interesting investments at the moment. Resona and Japan Post haven't a chance.

Now, the above horror-show statistics are merely on-balance sheet debt. They do not include guarantees and probable bail-out obligations of the central government. So the real debt load is far worse, as if that could be possible.

Add to this the unenviable posture of Japan's banks at the moment. They all hold huge amounts of JGB's and yen denominated receivables. Both will take a big hit, wiping out swaths of asset value. Questionable loans on the books will be exposed as bad and even good loans to marginal borrowers will sour. Depositors will flee in order to avoid currency controls if the yen crashes, all basically at the same time. A full-scale banking crisis will result, with all the usual consequences, except that the Japanese government and Bank of Japan will have no ability to rescue them, since they are already leveraged to the hilt and will be facing insolvency themselves as interest rates rise.

Even a 100 basis point rise in rates will trigger the above scenario. What will trigger this? Actually no trigger is needed. Japan will crash even if rates merely remain the same. But as rates rise in the U.S. over the next several years, Japan's demise is accelerated, since they will push up JGB rates.

And no, they won't simply buy more debt themselves. The population is shrinking by 1M persons/year, and foreign ownership of short term and gross debt has risen four years in a row, nearly straight-line. So it is impossible for them to continue to self fund the debt. Moreover, they only buy it now owing to the fact that deflation has given them good real returns. But the advent of 1% inflation, which is the BOJ's target now, means that DOMESTIC demand will now dry up as it searches for better rates. That really pops the balloon.

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