As of late, I have been intrigued by Japan. It is a part of the world that investors seem to detest ignore, despite signs of technical improvement.

I’ve talked about this in the office, and with some of our clients who either own specific Japanese names — or live there. The thought process is Japan is a potential surprise in 2011.

I first spotted this on FusionIQ; The reason was due to it flipping back and forth between a Neutral and a Buy in October. EWJ is a VERY interesting chart — much more so than the Nikkei Dow; EWJ is in a nice uptrend that slipped over its the December 2009 highs earlier this month; It just got over its April 10 highs this week.

Here are 10 Reasons I want to own some Japan for 2011:

10 Reasons to Think About Japan

1. Everyone seems to hates — or just ignore — Japan as an investment; its widely disliked for its bad demographics, aging population, ongoing MULTI-DECADE recession.

2. The chart! Nice uptrend, new highs.

3. Institutionally and on Main Street, Japan is VERY under-owned.

4. The island nation is still the 2nd biggest economy in the world in real (not nominal GDP) dollars; they are a huge exporter, and an industrial powerhouse.

5. Proximity to China: As it grows, Japan has easy access to even cheaper low end manufacturing. The high value engineering and design work stays in Japan, but the toxic smokestack industry moves to the mainland.

6. Improving global economy could help Japan’s export business.

7. If China rescues Europe, Japan benefits.

8. The country has shown long term resilience to misfortune — the only nation to be nuked (2X!)

9. Modern infrastructure, highly educated, excellent work force; forward thinking gadget-head consumers.

10. Consumer prices are anticipated being flat next year — the 1st time after 3 years deflation.

And did I mention I like the chart ? Note how many times EWJ got turned back at $11. What would get me really excited was a high volume breakout over $10.90-11.

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EWJ iShares Japan (10 Year Weekly)

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EWJ iShares Japan (12 Month (Daily)

All charts courtesy of FusionIQ

Category: Index/ETFs, Investing, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “10 Reasons I Am Thinking About Japan”

  1. SINGER says:

    Last time I heard Marc Faber on Bloombeg he spoke favorably of Japanese equities… So that’s good too…

  2. carrottop says:

    tks for reminding me:
    just sold a mini yen on my roth for you:

    as long as the yen remains strong,
    japan can’t exit its hole given it being heavily export oriented.
    but it will happen:
    with the largest debt/gdp ratio in the civilized world (200%),
    and an ageing and old pop,
    govt revenues are low and going down,
    govt expenses are high and going up.
    they will print their way out of this,
    currency will colapse.

    question is not if but when.

  3. BennyProfane says:

    You forget that this is payback time for China. The rape of Shanghai and all of those years, even to today, of Japan denying their WW2 atrocities are now coming due. They don’t have to do business with Japan with all of the alternatives close by, and, without any kind of military to speak of, the Japanese are literally a sitting duck out there in the water. I really doubt the western world will put up much of a fight to come to the rescue.

  4. JesseLivermore says:

    This is excellent — great contrarians don’t buy what’s hated, they buy what’s ignored.

    ~~~

    BR: That’s really the better word — I’ll change above

  5. machinehead says:

    Japanese equities produce choppy indexes that for whatever reason — manipulation? — just don’t trend properly. Breakouts fail, as do breakdowns.

    As the charts show, it’s a long, volatile exercise in going nowhere.

    Fractional interest rates are the only thing keeping Japan on life support. If nominal rates ever start to rise, Japan’s interest bill will ‘go exponential’ and snuff the life out of its economy.

    Economically, China is to Japan as the US was to Britain in the 20th century — that is, outgrowing the earlier leading nation. Britain’s special relationship with the US didn’t help its equity performance in the 20th century, nor is Japan’s proximity to China likely to be much of an advantage. Less-developed Asia — e.g., Vietnam — has far more potential to ride the Chinese growth wave than Japan.

  6. Petey Wheatstraw says:

    Japan was the first into the rabbit hole, and will be the first to emerge from it.

    Eat me.

  7. genomik says:

    i went to Tokyo recently, blew me away, their country is sooooo advanced. Especially in Robotics, and there might be a market for robots. Also I read once a few years back that Japan financed alot of Chinas boom. Somewhere Japan provided early money, got equity, contracts etc. 10 years ago China was not rich and Japan was, relatively speaking. As China gets more expensive and automation increases I think Japan stays competitive w China. In fact, I think Japanese have greater attention to detail than Chinese in their products. And Japan is a Western country, China is still communist, and playing nice with N Korea. Japan loves the West, China not so much. I generally prefer Japan over China. Even in culture, Harajuku and Manga is popular with everyone under 25. Japanese get technology and understand it fundamentally, Chinese are still mostly farmers. Nuff’ said

  8. Sunny129 says:

    Also recently Japan Govt has openly declared that they will Japan stock market by investing it’s sovereign funds ! No wonder EWJ is making waves!

  9. Petey Wheatstraw says:

    genomik Says:

    “In fact, I think Japanese have greater attention to detail than Chinese in their products.”
    _____________

    Any photography bug knows that a lens made in China for a Japanese company is inferior to the same lens design manufactured by the same company, but in Japan.

    A friend of mine runs a glass factory in China. He does not have very good things to say about the quality of the work done by his until-recently peasant workers.

  10. curbyourrisk says:

    OK…I am not anti- your pick here. BUT, as the senior analyst for the American subsidiary of a major Jampanese Import/Export Company let me give you a little anecdotal advice. I spent 2 weeks there at a managment workshop in Tokyo back in June. IT was lovely and I would go back again.

    1)Everyone hates Japan as an investment — widely disliked for its bad demographics, aging population, ongoing MULTI-DECADE recession.

    Thes reasons to hate Japan are well deserved. AND they are not going to change anytime soon. At economic meetings held within our country, I am privy to reports our management generates in Tokyo. The end result, THEY DO NOT BELIEVE ANY OF TIS IS GOING TO CHANGE IN THE NEXT 20 YEARS. Their goal is to find ways to profit from this, NOT to find ways of crating long term business ideas outside of Japan. Too many companies in Japan are happy with the status quo. You need to remember they aer a very proud people. Culture and Loyalty means everything to them. They are not one for change. THEY DO NOT ADAT WELL TO CHANGE.

    2) The chart! Nice uptrend, new highs.

    Sorry Barry, but the chart looks more like an advertisement for Trendtrader.com. (And I don’t mean to be offensive by that)

    3) Institutionally and on Main Street, japan is VERY under-owned.

    There are reasons for them to be under-owned and un-loved. Most of it starts with their government. Constant state of flux. Japanese companies design business plans around tax policy. They need a long term solution when it comes things like this and it changes all too often. Although, some recent tax decisions are very positive for Japanese companies and counter my arguement for the last 3 years that the head quarters should be re-incorporated as an American Company. With our HUNDREDS of subsidiares around the world we could tke great advantage of tax laws and not bring back the profits to America. In Japan, all profits come home……it kills them to do this, but again…back to loyalty to mother country. I figured if we could get the company to re-locate, maybe we could get a change in direction as well.

    4. The island nation is still the 2nd biggest economy in the world in real (not nominal GDP) dollars; they are a huge exporter, and industrial powerhouse.

    I need to correct you here a bit. They are not as big an exporter as you think. They have set up subsidiary companeis and JOINT-VENTURES around ASIA. They are big into the Joint-ventur thing. Very little is actually produced in Japan anymore. EVERY THING sold by Japanese companies (finished products atleast) are made in Asia, but necessarily in Japan. Japan is more of a materials supplier now.

    5. Proximity to China: As it grows, Japan has easy access to even cheaper low end manufacturing. The high value engineering and design work stays in Japan, but the toxic smokestack industry moves to the mainland.

    5) Personally I hate this point. China has turned Japan into thier bitch. As of rht industry moving to China….Have you been in to Japan. Very few young people are working right now. They are exporting their manufacturing system out of the country. That did not work well for us her ein the states, and will not work well for them either. Imagine that……Japan taking a page out of our workbook.

    6. Improving global economy could help Japan’s export business.

    6) even Japanese companies don’t believe this. The only thing that helps Japan right now is a strong China. They fear a strong China as much as they want one. There is VERY DEEP resentment in Japan concerning China. There is very little trust of China by the citizens of Japan. while I was in Japan, my Japanese hosts took me to a strip bar (they call them piano bars to prevent to stigma). I was told I could not go to thier level of the bar, as Japanese women were only for Japanese men. I had to go 2 floors up….that where the Chinese girls were. Needless to say, I wa not interested in Chinese girls. –AGAIN…it is all about culture.

    7. If China rescues Europe, Japan benefits;

    7) Wrong…if China rescues Europe…..GERMANY benefits. As much as Japan depends on China…THEY ARE COMPLETELY TIED TO THE HIP OF THE UNITED STATES. This is made clear in almost all of their economic reports.

    8. The country has shown long term resilience to misfortune — the only nation to be nuked — 2X!)

    8) And don’t think they have forgotten about this!!! They celebrate this. This is a positive for the Country, but I am not sure if I would use it as an investing point. They celebrate this more than just a rah rah sense or a rally call. If you go to the Ito museum in Tokyo, there is a very somber dislplay concerning this. The guide who took me around, and translated everything into English for me was very taken back and deeply apologetic about their entrance into the war. They believe they deserved it for their unprovoked actions against Peral harbor and it was necessary to end the war. I COULD NOT BELIEVE THIS. Of course, they do still hold many ill-wills toward America as a whole, but were very receptive and welcoming to me.

    9. Modern infrastructure, highly educated, excellent work force; forward thinking gadget-head consumers.

    9) Modern yes. Beautiful in fact. Cleanest trains and subways I have ever seen. The LIRR should og and see how things are supposed to be run. The problem is they have very little land. They need to drill for all building purposes. Land is extremely expensive, making projects expensive. They too are having funding issues and are finding it harder to fund such projects. I saw many, un-finished projects while I was there, and I spent most of my time in Tokyo. highly educated…YES. But part of my workshop included holding 2 seminars with their new hires. All the questions I got were about working in America…for American banks. Their youth does not want the old style of doing things. THEY WANT change. They want out of Japan. They all want to go work in the investment banks of Europe and America. (What idiots – haha) As for forward thinking gadgets…you got that right. I spent time at a local electronic shop and saw many cool items. Most of them I could not purchase and bring back to the USA. I was told the technology was not here in the states and would not be here for 2 years…if it ever came here at all.

    10. Consumer prices are anticipated being flat next year — the 1st time after 3 years deflation.

    10) What, now we are cheering ZERO growth???? It might be 3 years of deflation, but considering they have really been in the grips of deflation for a much longer period of time, I guess they would take this. They need thier Yen to depreciate and they are trying hard to do this. Sounds like they need to speak to our Mr. Bernanke about it.

    Over all Japan was great. BUT, I would not live there. And again…..I am not trying to by usual self and disagreeing with you just for the sake of disagreeing.

  11. dead hobo says:

    Sucker.

  12. [...] The bull case for Japan’s stock market. (Big Picture) [...]

  13. Mike S says:

    Japan could have a gigantic rally next year. I fully agree with this. They have been off the radar for so long that everyone has fogotten.

    Barry forgot to mention another bullish idea – they went through their real estate crash 20 years ago, and their banks are close to recovering.

  14. BennyProfane says:

    @curbyourrisk

    “The guide who took me around, and translated everything into English for me was very taken back and deeply apologetic about their entrance into the war. They believe they deserved it for their unprovoked actions against Peral harbor and it was necessary to end the war. I COULD NOT BELIEVE THIS. Of course, they do still hold many ill-wills toward America as a whole, but were very receptive and welcoming to me.”

    This is not what they teach their children. Contrition is a show for the western tourists.

  15. jaymaster says:

    CAJ been berry berry good to me….. Gotta keep an eye on the yen, though.

  16. NickAthens says:

    Hmmm. I too want to believe.

    I keep telling myself to separate corporations from the government problems.
    On the government side interest payments are 25% of GDP. But the debt is financed by the people, they do not sell their debt overseas like the U.S. or Europe. Even worse they run short term and just keep roling it over. Now it looks like the people are running dry.
    So if jaan had to pay normal rates which would like be 2-3x what they pay, what would happen?

    So. bottom line, Japan debt is far worse than Europe or the U.S. Chances are only the chinese will rescue, and you can imagine the stress involved in that!

    But, that doesn’t mean the individual companies are equally troubled! But realize they too have become marketing companies, like the U.S. , they too exported their manufacturing.

    Is it just my old age or have investing decisions become much more complicated by having to considering the country environment impacts as well?

  17. Population growth rate: -0.5%

    Suckerx2.

  18. PDS says:

    no catalyst in sight to rip them from chronic deflation….its a trade at best…

    btw BR…you are neglecting the negative impact of stronger yen, lower global consumption vis a vis austerity and break out of competitive devaluations around world…not helpful for an economy weighted toward exports

  19. [...] 10 Reasons I Am Thinking About Japan [...]

  20. They are on the edge of something. I don’t think it is a boom

  21. genomik says:

    @curmudgeon: a low or negative growth rate is perhaps the best thing Japan has going for it! Workers have been a good thing typically, but as automation and productivity increase, high populations will just result in high unemplyment! We may be seeing the beginnings of that in USA now. Furthermore, since Japan is the most advanced automation country in the world, they could have an advantage over the rest of the world. Rapid pop growth is a bad thing, look at how China improved since one child policy. As structural unemployment grows due to automation worldwide, Japan will have a relative advantage.

    True Japan does have some challenges like debt, but they are such an ingenious society, if they cannot progress well, we are all doomed!

  22. Jack Damn says:

    11. Anime & Manga.

  23. [...] – Why Barry Ritholtz is thinking about Japan. [...]

  24. louis says:

    And they gave us Godzilla. I’m willin to ride for a year. Let’s see what happens.

  25. oulous says:

    Funny.

    I always laugh when I hear the “we dont want to become another japan”

    In short what this means are rich people saying I dont want my assets to deflate. In real living terms I would give anything if the US would become another japan.

    Great public transportation, strong middle class, low crime, clean cities, cheap real estate, politeness is respected, technology and science oriented…. on and on.

    Japan is something to aspire to not fear. They have a fundamental debt problem, I understand but the design of the society could survive a major crisis and rebuild.

  26. MikeW says:

    I can no more read that chart than I can Kanji, but I must say that reason #8, about having bounced back after being nuked, sounds a bit flippant to me. Is that truer now than at any time since 1989?

    Perhaps BR had a 9 reason list and needed to round up?

  27. drey says:

    And I’ll offer one very good reason to NOT think about Japan – ongoing dolphin and whale slaughter in defiance of international protocols.

    Fuck ‘em.

  28. crankitto11 says:

    Barry, as a close follower of the Japanese economy, I respectfully disagree with your analysis.

    Afrer 20 years of almost continuous deleveraging, deflation, depopulation, and industrial hollowing out of the Japanese economy, the average Japanese investor is dispirited and no longer trusts equities, similar to small US investors for the 30 or so years after the Crash of 1929. Most of the price swings on your charts were generated by foreign hedge fund “hot money,” rushing in and out in reaction to fluctuations in interest rates and exchange rates– at least according to the Japanese market analysts I listen to. So investing in Japan might make sense as a very short term move– or as a very long term move.

    Japan has not really figured out the digital age yet. Its expertise has been and continues to be manufacturing. The problem is that Korea, Taiwan, and China now make AND design almost as good hardware at a fraction of the price, except for the very high end. Japan needs to move into high value added software and services, where it can leverage its high educational level and avoid price competition from its Asian neighbors. But the venture capital ecosystem that typically generates new, high value added IT businesses in the US does not exist in Japan. Outside of games, it is hard to think of many exciting software innovations coming out of Japan.

    Given the high work ethic and educational level of the Japanese people, they will eventually figure out what they need to do and do it, but it is not likely to be a short term turnaround.

  29. philipat says:

    Shouldn’t “Single digit P/E ratio” feature in the top ten?!!

  30. DebbieSmith says:

    But, here’s what the macroeconomic indicators say. Japan is facing a demographic shift that will result in decreasing population making it difficult for the country to manage its $10 trillion debt. Here is a link to an article discussing the 3 main factors that would cause me to pause before heavily investing in Japan:

    http://viableopposition.blogspot.com/2010/08/japan-are-three-ds-going-to-kill-its.html

  31. philipat says:

    Agreed, it’s just become very undervalued and represents a short-term trading opportunity. The Japanese are the world’s premier racists and are not about to change, even under extreme pressure, so the long-term demographic problems will just get worse and unaddressed.

    Debt/GDP at 275% doesn’t help.

  32. [...] discussed this last year (10 Reasons I Am Thinking About Japan), but its nice to see the big boys catching [...]

  33. baychev says:

    Barry,
    seriously, are these the best supporting arguments you could come up with? Even the chart is not convincing, there is no strength in it, just a marginal creep up, like a house being built of cards.

    and you are expecting positive returns given their ageing population? people will be sellers of assets, first will go the ones that generate no returns. as others said it, in order to be competitive, japanese companies have to more aggressively move production out of the country. how will this impact incomes and investments?

    and my biggest concern: their track record. for 25+ years they are in the dolldrums while racking up debt for marvelous but economically insensible projects. these are and will be weighing even more on their
    competitiveness. even if they want, theey cannot reverse course easily and wpipe debt off the books. they are resisting change and squandering the wealth they’ve accumulated on public nonsense projects. would you hold as an investment the equity of a company that does not make economically sensible decisions? i would not… and i am short the yen.