The opposition has different ideas about what the Japanese economy looks like. That means you should be buying different Japanese stocks, not the well-known names.

The Liberal Democratic party (LDP), in power since 1954 except for 11 months in the 1990s, hasn’t done a bad job. After all, Japan is hugely richer than in 1954. However, after a successful period in 2001-06, the country has had three prime ministers in three years. The current leader, Taro Aso, believes in heavy government spending, particularly on infrastructure. That reflects the party’s traditions, which have favored exporting companies and the construction sector. Those traditions and priorities have also made Japan’s public debt 180% of gross domestic product (GDP).

The opposition Democratic Party of Japan includes the Socialists, and favors higher social spending. However, it also wants to encourage domestic consumption, and to kill the big construction projects on which the LDP has spent so much. Economically, the Democratic Party’s platform makes sense, certainly given its shift in emphasis away from the programs focused on in the last few years. Politically, voters are tired of the LDP and badly want a change. Hence the DPJ is likely to win a majority in next month’s election.

That probable victory has major implications for investors.

• For starters, let’s consider the big exporting companies. Such players as Panasonic Corp. (NYSE ADR: PC), Sony Corp. (NYSE ADR: SNE) and Hitachi Ltd. (NYSE ADR: HIT) – may become less prominent, as they won’t have such strong backing from the government bureaucracy. The construction companies – Komatsu Ltd. (OTC ADR: KMTUY), Kajima Corp. (OTC ADR: KAJMY),Sumitomo Realty & Development Co. Ltd. (OTC: SURDY) and the like – will do less well.
• On the other hand, domestic-oriented companies, particularly in consumer products, should benefit. Low-end consumers may do better than high-end, so we’ll look for basic goods.

The Japanese market is still down more than 75% from its 1990 high, although it has rebounded about 30% from its March lows. Japan had a bad recession: The Economist expects 2009 GDP to be 6.1% below 2008. Nevertheless, the economy looks poised for recovery. If that happens, the market will do well, and consumer-oriented stocks will do especially well. Many Price/Earnings (P/E) ratios look high – as is common in Japan – but Japanese accounting is conservative and a real economic recovery could bring rapid earnings growth. Still, in searching for the most-promising profit plays, I will look for P/Es of 20 to 22, or less, to keep values reasonable. How to buy them: Most Japanese companies these days trade as American Depository Receipts (ADRs), that trade only on the “Pink Sheets.” Those are not very liquid in New York. However, some brokers – such as E-Trade (Nasdaq: EFTC) – now allow you to trade directly on the Tokyo stock exchange. So I’ll give you both the Tokyo symbol and the OTC ADR symbol, and you can choose which way to go. Here are the seven ways to play Japan’s election (with one bonus pick for good measure):

• Kao Corp. (4452; OTC ADR: KCRPY) is a classic consumer-products company – kind of like a Japanese version of The Procter & Gamble Co. (NYSE: PG) here in the United States. Kao produces cosmetics, laundry and cleaning products, making it a domestically oriented company that should do well as Japan’s consumer spending improves. Stock stats: The company’s stock trades at 17 times earnings and yields 2.7%.

• Kirin Holdings Co. Ltd. (2503; OTC ADR: KNBWY) produces beer, soft drinks, food products, whiskey and pharmaceuticals. In addition to its strong position in Japan, Kirin is a major player in the East Asian market. Stock stats: P/E ratio 16; stock yields 1.6%.

• Circle K Sunkus Co. Ltd. (3337; PINK: CLKSY) is a nationwide convenience store chain that sells food, beverages and gaming software. Stock stats: P/E ratio 13; dividend yield 2.7%.

• QP Corp. (2809; OTC ADR: QPCPY) produces mayonnaise, salad dressing, egg products and health foods. Stock stats: P/E ratio 17; dividend yield 1.5%.

• Showa Sangyo Co. Ltd. (2004; OTC ADR: SHSGY) produces and sells flour, cooking oils and confectionary products. Stock stats: P/E ratio 19; dividend yield 2.4%

• Seven and I Holdings Co. Ltd. (3382; PINK ADR: SVNDY) is a merger of Ito-Yokado, 7-11 Japan and Denny’s Japan. It operates convenience stores, food stores and fast food restaurants.Stock stats: P/E ratio 22; dividend yield 2.5%.

• Eisai Co. Ltd. (4523; OTC ADR: ESALY) produces and sells prescription drugs and medical equipment in Japan and overseas. Stock stats: P/E ratio 19; dividend yield 4.2%.

Check the companies carefully before investing (most have Web sites), but the above are some suggestions of companies in interesting sectors that appear solid and not overpriced. If you don’t feel confident about investing directly in Japan, you could also consider investing in the largest Japan-focused exchange-traded fund (ETF), iShares MSCI Japan index (NYSE: EWJ). The EWJ ETF currently has a P/E ratio of 15. 

Source: Eight Ways to Profit From Japan’s Game-Changing Election

Editor’s Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best – because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world’s financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.

The Permanent Wealth Investor assembles high-yielding dividend stocks, profit plays on gold and specially designated “Alpha-Dog” stocks into high-income/high-return portfolios for subscribers. Hutchinson’s strategy is tailor-made for periods of market uncertainty, during which investors all too often go completely to cash – only to miss some of the biggest market returns in history when market sentiment turns positive. But it can work in virtually every market environment.To find out about this strategy – or Hutchinson’s new service, The Permanent Wealth Investor – please just click here.

Corporate profits are plunging, as unemployment soars. Investors have watched as the worst bear market since the Great Depression savaged their savings and plundered their pensions.

But Money Morning Contributing Editor Martin Hutchinson, a well-known expert on income investing, says that today’s beaten-down market may represent the best opportunity in years to create real wealth – in fact, permanent wealth. And Hutchinson believes that there are right now two simple secrets that can pave that pathway to permanent wealth.

One is high-yielding dividend stocks.

And the other is gold.

“Since last September’s crash, it has again been possible to invest in common stocks with some solid assurance that in the long run, you’re not throwing your money away,” Hutchinson, a veteran international investment banker and editor of The Permanent Wealth Investor said in an interview this week. “The market is now close to a sensible long-term level; The Dow Jones Industrial Average at its historic high of 14,000 was a mirage – and a very dangerous one for investors.”

Hutchinson spoke with Money Morning Executive Editor William Patalon III on Monday and detailed his Permanent Wealth Investor strategy.

Here are the highlights of that interview:

Money Morning (Q): You talk about “Permanent Wealth.” Thanks to the implosion of the U.S. housing market and the subsequent collapse of U.S. stock prices, American investors have lost an aggregate $12 trillion in total wealth. Against such a backdrop, is the concept of “Permanent Wealth” still a realistic concept?

Martin Hutchinson: It’s actually a more realistic concept than it was between 1996 and 2007, when the stock market was so overvalued. There was a celebrated Jim Cramer tantrum last week, when somebody said retirement investors needed more Jack Bogle (the founder of The Vanguard Group, famous for index funds) and less Cramer. Cramer was right; if you’d bought an index fund Bogle-style in 1999, you’d have lost a lot of money over the last 10 years.

Investing like Cramer – by picking stocks and trying to get the timing right – you might well have lost your shirt, but Cramer did say in 1999-2000 that the tech sector was wildly overvalued and dangerous, and that was extremely useful information. Since last September’s crash, it has again been possible to invest in common stocks with some solid assurance that in the long run, you’re not throwing your money away. The market is now close to a sensible long-term level; The Dow Jones Industrial Average at a historic high of 14,000 was a mirage – and a very dangerous one for investors.

(Q): Just what is “Permanent Wealth” and how does an investor pursue it?

Hutchinson: What I like to refer to as “Permanent Wealth” is the kind of wealth that you can count on over the long term, or – ideally – permanently. It’s the kind of wealth that 18th century aristocrats left in entail for their descendents; today it’s the kind of wealth that finances your dreams – even fast cars and houses in the Hamptons – but still leaves you with more money than you know what to do with, meaning that you can live the rest of your life in comfort, and still be sure to enjoy a safe-and-secure retirement.

Investors pursue permanent wealth by following a third investment strategy – not the index fund strategy of John Bogle, nor the in-and-out speculative trading of a Cramer – but something more akin to the search for value and cash flow of a Warren Buffett. I’m talking, of course, about the early-vintage Buffett, before he got so rich and famous in the 1980s, and before his track record became less special. And the best way you can be sure a company is going to give you solid and increasing cash flow is to find one that’s actually doing so, quarter by quarter, by paying out high dividends.

If there’s a lesson to remember, it’s this: Earnings can be manipulated; dividends are cash.

(Q): That brings us to a very important point. Most experts – when they outline strategies for creating wealth – focus on capital gains. But you focus on income – especially dividends. Why is income investing the better path to travel?

Hutchinson: The problem with going for capital growth is that you very often don’t get it, and then you’ve got nothing – the investment just sits there. As I’ve discussed here in Money Morning many times before, buy dividend stocks – and you will at least be well paid as you wait for the market to go up.

The other reason for buying dividend stocks is that capital gains are so damnably difficult to spot. Tell me honestly: Are you really capable of telling which kind of high-tech widget is going to take off and which one will turn out to not have the “magic” features the techno-geeks want? Me neither, and I’m a Math major, so if this stuff was comprehensible, I would be able to understand it. I had a pretty good grasp on what the Wall Street whiz-kids were doing wrong during the bubble [Editor's Note: Hutchinson was recently cited by Slate magazine for "calling" the market bubble, and forecasting the stock-market decline].

Dividends are easy – you can drop them on your foot, as it were. All you have to do is figure out which companies are run by sharpies – and are paying dividends out of capital – and which companies have genuinely solid business models that aren’t going away.

(Q): Dividends … they seem so basic … why is it that they’re actually so powerful? And why do so many investors fail to see this power?

Hutchinson: Investing for high dividend payouts is a type of “value investing” – investing in stocks with low Price/Earnings (P/E) ratios, or in companies whose stock prices are low relative to the firm’s asset values.

With this focus on dividends, you reap all the benefits (the higher returns) of the value-investing strategy. However, by investing in stocks with high dividend yields, you also are getting paid to wait. And you’re also defending yourself against a corporate management that wants to throw away your value through unwise investments: Once you have the cash, it’s no longer locked up inside the company; it’s yours to keep.

Investors don’t see this because they buy stocks through brokers and read about stocks in the financial media. A 100% capital gain is much more exciting than a 10% dividend yield, and a new tech concept that turns out to work is more exciting than a business that just keeps on turning out good profits and paying those profits out to shareholders as dividends.

What’s more, high-yield stocks lend themselves well to a “buy-and-hold” strategy that maximizes returns for the investor but not for the broker. If a growth stock doesn’t go up, the investor has nothing; but the broker can then make another commission by making the investor switch to a different “growth” stock, playing on the investor’s boredom and feeding him a new “concept.”

Corporate management teams, Wall Street stock brokers, and even the mainstream news media all have a vested interest in promoting “growth” stocks to investors; it’s not surprising that most investors buy mostly what is sold to them.

(Q): How do dividends create wealth?

Hutchinson: Dividends create wealth in two ways.

First, they provide cash flow that you can either use for living expenses or to reinvest: That means there’s no more having to sell shares, often at a depressed price, to meet your monthly bills, or to finance a vacation or home remodeling.

Second, if you buy shares with high dividend yields, there’s a good chance that the market will eventually notice the superior [dividend] payouts, and revalue the shares so that their dividend yield is back down around the market’s average. For a dividend yield to go down in this manner, the stock price has to go up. Once that happens, you have received dividends and capital gains.

(Q): You talk about the three key steps of permanent wealth creation? What are those three steps? How do they work?

Hutchinson: The first step is to invest in stocks with high, stable dividend yields – yields, in fact, for which there’s a good chance of an increase.

The second step is this: When the high-yield stocks you’ve invested in revert to normal market dividend yields (because the share price has risen, pushing the dividend yields down), sell those shares for a nice capital gain, and invest the newly increase proceeds in newly selected high-yield stocks. By following this part of the strategy, you’ve increased your capital and your income.

The third step is to increase your capital still further: Invest small portions of your capital, or perhaps some of your higher income, in options, the currency markets, or in other income-related or gold-related investments.

In fact, let’s make sure to return to the topic of gold in just a moment.

(Q): Is gold also part of this strategy? Why so? What do you see that makes gold such a powerful part of “Permanent Wealth?”

Hutchinson: Gold and gold-based investment – such as gold-mining companies – are an important part of a permanent-wealth-investment strategy because of gold’s historic function as a store of value that is impervious to inflation. At the moment, when inflation is low but there is a big danger of it rising, gold investments are an essential protection for permanent wealth investors.

(Q): Having closely studied the Obama administration stimulus and bailout programs, why do you feel that inflation is an almost-certain part of our future?

Hutchinson: Two factors in government policy make me expect a big resurgence in inflation: fiscal policy and monetary policy. Fiscally, U.S. President Barack Obama is running the biggest deficits in U.S. history, which will push up yields in the U.S. Treasury market, cause the dollar to decline and cause inflation to surge because of the debt burden. Monetarily, broad money [M2, Money of Zero Maturity (MZM) or M3, take your pick] has been rising at an annual 15% clip since September – which will feed through to inflation once the economy bottoms out.

Finally, there’s the combination of the two: [U.S. Federal Reserve Chairman] Ben S. Bernanke buying $300 billion of U.S. Treasury bonds over the next six months, and printing money to do so. That means printing money is being used to finance 15% of the $2 trillion in government spending during those six months. Germany’s Weimar Republic used printing money to finance 50% of government spending in 1919-1923, and ended up with 1 trillion percent inflation.  We’re not quite there – yet. But we’re headed in that direction.

(Q): What’s your overall outlook for the U.S. and global economies? In the near term? The long term? What should investors watch for? How will that outlook affect “Permanent Wealth?”

Hutchinson: I’m quite optimistic about the short-term; I think this recession will reach bottom in about the third quarter of 2009. However, after that the huge budget deficits and rapid money-supply growth will make early recovery impossible. Instead, for several years, we’ll have persistent quite high inflation, sluggish growth and probably a weak dollar.

That means the U.S. stock market won’t go anywhere for some time – but “Permanent Wealth” investors will get dividends and inflation protection, meaning they needn’t fear such a scenario.

Internationally, those countries without the big fiscal deficits and monetary expansions will recover quickly, as in a normal recession. In Europe, that’s Germany and possibly France. In Asia, that’s Korea, Taiwan and China (which has had “stimulus” – but had a surplus, beforehand – so can afford it). In Latin America, that’s the well-run countries – Brazil, Chile and Colombia.

Permanent Wealth Investors will make sure to have a substantial part of their money in Alpha Bulldogs from those countries.

[Editor's Note: When Slate magazine recently set out to identify the stock-market guru who most correctly predicted the stock-market decline that accompanied the current financial crisis, the respected online publication concluded it was Martin Hutchinson, a veteran international investment banker who is one of Money Morning's top forecasters.

It was no surprise to our readers: After all, Hutchinson warned investors about the evils of credit default swaps six months before the complex derivatives did in insurer American International Group Inc. Then last fall, Hutchinson "called" the market bottom.

Now Hutchinson has developed a strategy for investors to invest their way to "Permanent Wealth" using high-yielding dividend stocks. Indeed, he's currently detailing a strategy that will enable investors to make $4,201 in cash in just 12 days. Just click here to find out about this strategy - or Hutchinson's new service, The Permanent Wealth Investor.]

Source: Why Dividends and Gold Are the Keys to Permanent Wealth