Buying a basket of stocks and holding them for the long term is one way to financial freedom. But if the basket of stocks happens to be the Japanese market, the better strategy appears to be staying nimble: Jump in when the market is down and jump out when it's up.
Right now, the market is down – a sign that a good entry point is here for the taking.
For sure, Japan has been a big disappointment for investors ever since its benchmark index, the Nikkei 225, topped out in 1989. Since then, it has slumped a total of 65 per cent (you read that right), implying that the only good Japan-focused investment strategy has been to stay far away. Most investors have done just that.
However, there have been numerous times over the past 20 years when Japan's moribund economy has shown signs of picking up, and during these moments the stock market has actually done very well for brief periods. Between 2002 and 2003, the Nikkei 225 shot up 57 per cent, then slid back. It rose 62 per cent between 2004 and 2005, then sagged 35 per cent between last summer and this March. It has since blasted off again, rising 16 per cent since March.
Now, a number of economists believe the country – which suffers from political ineptitude, crippling demographics and a strong currency, not to mention a slowing U.S. economy for its exports – is heading into a recession.
You might conclude that this is the worst time to buy a Japanese exchange-traded fund (such as iShares MSCI Japan index fund, which trades in New York), but a lot of the bad news appears to be built into the market already. Chen Zhao, managing editor at BCA Research, noted recently that the Nikkei 225 was in “deeply oversold” territory toward the end of April.
The stocks in the index currently trade at 16 times earnings – relatively cheap by international standards, given that Canadian stocks trade at 18 times earnings and U.S. stocks trade at 23 times earnings.
What's more, Mr. Zhao noted that Japanese stocks tend to outperform their global counterparts when the U.S. Federal Reserve is well into a rate-cutting campaign (it has reduced its key interest rate to just 2 per cent recently) and prospects for global economic growth are picking up (it's hard to imagine they could get much worse). That's because its economy relies on exports.
Japan should be able to keep its interest rates low to stimulate economic growth, given that inflation is not a going concern even with rising energy prices. Plus, the economy will get a nice jolt if, as some observers believe, the value of the yen has nowhere to go but down; it is not far from a 13-year high against the U.S. dollar right now.
As you can see from recent examples, when Japan takes off, it really rallies, rewarding investors with quick double-digit gains.
The trick to making money on Japan in the longer term, though, is to stay on your feet: When times are good and the market is soaring, take your money and run. If the past two decades are any indication, there will be many other opportunities to buy again.
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