If you think about a powerful creature plowing through the
streets of Tokyo, then you probably think of Godzilla. However, I
suspect there's about to be another type of powerful animal running
through one of the world's greatest cities -- and that's a
I've been watching Japan'seconomy closely for the past two
decades for a number of reasons, but the main one is to see the
effects ofdeflation on a country. Recent developments, however,
have drawn me into a new thesis for the third-largest economy in
the world -- and theequities pegged to its fate.
On Sunday, Dec. 16, the Japanese people elected Shinzo Abe as
the new Prime Minister. Part of Abe's economic policy, which he has
openly lobbied for during the past several weeks, is to have the
Bank of Japan (BOJ) increase itsinflation target to 2% or 3% from
its current 1%. Given the inflation targets here at home, a small
increase in the BOJ's inflation target actually represents a marked
shift away from deflationarycentral bank policies to inflationary
central bank policies.
You see, after 30 years of economic stagnation, and rewarding
savings overinvestment (a result of a deflationary cycle), the
winds of change are blowing through the Land of the Rising Sun. If
amonetary policy change is put in place for the first time in a
generation, then the Japanese peoplewill be more incentivized to
invest their capital rather than just plow it into Japanese
governmentbonds . The result of what will amount to easier monetary
policy will be the same as it has in this country, namely the value
of thecurrency is likely to decline while Japan'sequity market goes
My oft-cited colleague, Tom Essaye of
The 7:00's Report
, someone who also has been following the Japan thesis closely, put
this sea change in Japan policy and its implications for Japanese
stocks in the followingbullish terms: "Think of it like being able
to invest in the Dow before the first round ofQE bythe Fed (which
depending on when you date the first QE was anywhere between a 30%
to 60% rally ago)."
Tom almost always gets it right, and I think he'sspot on once
again. You see, Japanese stocks will be the beneficiaries asmoney
is put to work in the space, and as Japanese export companies
benefit from a weak yen.
As traders, we need to jump in front of this trend, and the best
way to do just that is by allocating to anexchange-traded fund (
) that holds the biggest and best Japanese companies, but that also
has a bit of currency protection.
WisdomTree Japan HedgedEquity Fund (
invests in some of the largest Japanese companies, but at the same
time it hedges out thecurrency risk . That means you get the upside
priceappreciation I'm expecting on Japanese stocks, without the
worry about a declining yen cutting into returns.
In recent weeks, we've seen heavyfund inflows in DXJ. One report
cited an approximate $82.8 million dollar inflow over the past
week, which is a 12.8% increased inflow week over week. The
increased money flow into the space of late has created a big price
surge in DXJ, and the fund now has blown past its 50-day and
200-day moving averages. I suspect that if Abe is elected, you'll
see a continuation of this upward trend that could take DXJ well
beyond its52-week high .
Action to Take -->
Buy DXJ at themarket price . Set stop-loss at $31.65. Set
initialprice target at $40 for a potential 16% gain in two
Finally, keep in mind that political winds of change are forever
fickly, and this whole thesis could unwind in the face of political
opposition. However, it certainly seems like Japan is primed for a
policy change, and a leadership change -- and that's a change that
could translate into big money in your pocket.
This article originally appeared on TradingAuthority.com:
Don't Miss the Raging Bull That Could be Just
Around the Corner in This Market