After 54 years of near-single-party rule – not to mention two decades of economic malaise – it’s not surprising that voters eager for change delivered a landslide election victory to the opposition in that key Asian nation.

Last weekend’s Japanese election represents a major milestone for Japan, and may well change the world’s second-largest economy in unexpected ways. Many of things we think we know about Japan may simply have been policies of a Liberal Democratic Party (LDP), which has been in power for all but about 11 months over the past 54 years.

The “new Japan” may in certain respects be very different.

For example, we think of Japan as a country dedicated to exports. The big exporters are aided by cheap loans. Upon retirement, senior government bureaucrats get jobs with those exporters, a practice known as amakudari – descent from heaven. Not surprisingly, Japan runs a more or less permanent trade surplus.

Under the new Democratic Party of Japan government of Yukio Hatoyama, that may change. Hatoyama has pledged to end “amakudari” – even as he reorients the economy towards domestic spending. If he succeeds, the exporters may do less well, but the economy may be more balanced. As a result, Japan’s economy may finally begin the economic recovery that Japanese consumers have been awaiting for 20 years.

Japan is also famous for its infrastructure spending – at its peak in 2001, state-funded infrastructure spending was equal to 6.5% of that country’s gross domestic product (GDP) – a level that’s twice that of Japan, the next-biggest spender.

While anyone who has dealt with Northern Virginia traffic knows that infrastructure spending can be a good thing, much of Japan’s spending was wasted on remote rural areas, which happened to be homes to politically connected LDP barons.

Hatoyama has promised to redirect about 3% of GDP from infrastructure spending to payments to individuals. He will pay each family with children $3,000 per child per year. This should help Japan’s demographic problem – its population is declining and is heavily weighted towards retirees. It will also boost consumer spending, especially among middle-income families.

Hatoyama’s program offers no supply-side remedies for Japan’s economic ailments. Those were the policy of Junichiro Koizumi (Japan’s prime minister from 2001-2006), who seemed to be bringing Japan back from recession. Koizumi’s faction lost out in the LDP power struggle, but may make a comeback. Big-spending Prime Minister Taro Aso has resigned from the party leadership, and his most likely successor, former Japanese Health Minister Yoichi Masuzoe, is a supporter of Koizumi’s approach.

Nevertheless’ Hatoyama’s policies will reorient Japan’s economy towards domestic spending. The danger is Japan’s budget deficit (8.9% of GDP in 2009, according to estimates by The Economist) and its debt. With GDP down this year and spending up, the International Monetary Fund (IMF) has estimated Japan’s debt at 217% of GDP by the end of 2009. Only one country has recovered from debt that high – Britain, whose debt hit about 250% of GDP in 1815, only to reach that level again in 1945, at the end of two huge wars.

Hatoyama must hope that Japan’s recovery from this recession is a swift one. A sharp bounce in GDP, maybe 5%-6% growth in the first year, would make the debt level much less daunting, and allow good progress towards balancing the budget. After almost 20 years of near-recession, that’s perhaps not too much to ask.

For investors, Japan looks attractive. The stock market is still trading at less than 30% of its 1990 high. However, the Japanese companies you have heard of are not the ones to buy. They are too large and too oriented towards exports. The construction companies should also be avoided – they have benefited from the fixation on infrastructure.

However, buying smaller Japanese companies is a problem, because they do not have actively traded American Depositary Receipts (ADRs) so you really have to buy them on the Tokyo Stock Exchange. The good news is that some brokers, notably E*TRADE Financial Corp. (Nasdaq: EFTC), will allow you to trade Japanese shares.

If you intend to trade on the Tokyo exchange, you might want to look at some of the Japanese retailers and consumer-goods companies. Even with these more-upbeat prospects, though, you should be careful not to overpay – a Price/Earnings (P/E) ratio of 20 should be your upper limit.

For those without access to the Tokyo market, there are two alternatives. One is the exchange-traded fund (ETF) covering the entire Japanese market, the iShares MSCI Japan Index (NYSE: EWJ). That has market capitalization of $5.26 billion, meaning it has adequate liquidity.

However, too much of it will also be invested in shares of the big exporters and construction companies.

The other alternative therefore is a mutual fund, the Fidelity Japan Smaller Companies Fund (Nasdaq: FJSCX). That has expenses of 1.1% and a total size of $394 million. It represents the most readily available way of investing in domestic Japan.

With the new government, Japan will look very different in a few years. Profit opportunities will arise.

As investors, we should look to capitalize on these changes – as well as the opportunities they create.

Source: Landslide Election Victory in Japan Will Lead to an Avalanche of Future Profits for Global Investors

Mention Japan and many people think of Geisha, castles and samurai. Mention investing in Japan and the image of an impenetrable wall comes to mind.  I’ve been extremely fortunate to have seen all of this firsthand – and not just once, but on a pretty consistent basis for the past two decades, when I’ve been here as a businessman, a resident, and – most recently – as a husband and a parent.

Like anyone who’s lived as an expat anywhere for an extended stretch, my powers of observation have tuned into specific aspects of the Japanese culture that I find fascinating.

For instance, since the days of the samurai, rarely has anyone ever questioned anybody’s authority directly – let alone openly. To do so was to risk the loss of one’s head – literally. But for the first time in several hundred years, that reticence to challenge authority is ebbing, and it could be the change that prospective investors have long been looking for.

I recall watching in rapt fascination the whole T. Boone Pickens/Koito Manufacturing battle during my first years here. In case you don’t recall, Pickens became Koito’s largest shareholder by accumulating more than 20% of the company’s stock and then was refused a seat on the board.

The battle came to a head during an annual meeting whose audience was filled with ruffians, embarrassed executives and a crowd of professional hecklers. I didn’t understand until years later that there was nothing “random” about that day 20 years ago: The crowd had been stirred up intentionally and professional hecklers had been hired to deliberately break up the meeting. In fact, it was their job to keep Koito Manufacturing’s senior executives from having to answer Pickens’s pointed questions (although to outsiders, it would just look like some ne’er do wells had gotten out of hand).

Pickens would not be put down.

Much to the chagrin of my Japanese colleagues, I stood up and cheered when the American tycoon picked up his things and famously stormed out with a collection of Japanese media crews in hot pursuit.

Fast forwarding to the present, I find myself reliving those memories, for I’m watching a repeat performance unfold. The cast of players is a bit different – this time it’s the Japanese investor, instead of a U.S. corporate raider, that’s trying to buck the system – but the plot is much the same.

The normally reticent Japanese investors – long accustomed, or even resigned, to public subtlety and backroom wheeling and dealing – are becoming fed up with this system and are becoming quite brazen in their protests. And very direct, as well.

Pickens would probably love it. In fact, I’m virtually certain that he does, though I’ve not spoken with him in years.

According to a Nomura Securities Co. Ltd. research report cited here by several news media outlets, more than 70% of individual shareholders intend to vote against management in upcoming elections and on specific issues. Normally, shareholder votes are essentially “rubber-stamp” affairs, pretty much signing off on whatever management wants, so this is an earth-shattering change.

Western institutional investors have picked up on this cultural about-face, since it means they may finally have the voting clout they crave when it comes to obtaining board seats and operational input on how the trillions of dollars they’ve invested here over the years is put to work. I’m fascinated, because it means that the Japanese executives who up to now had only themselves to answer to must now answer directly – and publicly – to their own investors.

And there are many questions to be answered. Japan’s stock market is at 26-year lows and recent economic reports continue to portray poor business conditions here. The so-called “green shoots” of economic recovery that are being written about in the United States look a lot more like weeds here Japan. And barring something miraculous that surfaces in response to the upcoming legislative elections, it’s clear to me that Japan’s elected leaders learned absolutely nothing from that country’s so-called “Lost Decade” – a slowdown that’s actually lasted the better part of two decades.

In fact, current Japan Prime Minister Taro Aso has an approval rating is only 19%, the lowest recorded level in history. Primary-schoolteachers are actually admonishing their students not to become like him. Can you imagine?

Openly angry investors I’ve talked with here in the last few weeks want to know why the return on equity has been so low for so long. They’re asking how Japan’s once-glorious companies have just fallen off the face of the earth? And then there’s capital usage, investment spending and, gasp, the global financial crisis. Who knew what and when did they know it? This is going to get ugly. My father in law, who’s normally calm about these things, wants them all lined up and thrown out – after he gets a chance to personally chew them out!

According to the Nomura study, executive compensation and skipped dividend payments are hot buttons, too, for individual investors – and with good reason. For the year ended March 31, about 38% of listed Japanese companies have skipped their dividends or have cut them entirely. For the typical Japanese citizen – who has accepted benevolent leadership for centuries — this is not only a stunning breech of public trust, but a callous slap in the face that must have been similar to the waning days of the samurai, when various lords called “daimyo” could no longer meet the public obligations of their retainers.

To borrow an old expression, it’s clear that the “natives are restless.” And it’s not just the natives. Such relatively recent Western “imports” as hedge funds and institutional money-management firms are feeling militant, as well.

Southeastern Asset Management Inc. is on the warpath over investments it’s made in Nipponkoa Insurance Co. Ltd. The Tennessee-based fund manager owns approximately 17% of Nipponkoa and wants some answers as to why the company’s shares have plummeted 19%, when the benchmark Topix Insurance Index has dropped only 6% in a comparable time period.

Twice now – in each of the last two years – Southeastern has attempted to oust Nipponkoa Insurance Co. President Makoto Hyodo for allegedly having run the ship aground.

In a similar fashion, Brandes Investment Partners LP sought a shareholder vote that would have forced Kyoto-based electronics manufacturer Rohm Co. Ltd. to buy back $157 million worth of company stock. Brandes, which owns about 6% of Rohm, felt that the $3.24 billion (311 billion yen) worth of cash and securities Rohm held was excessive, and presumably was a drag on the performance of the company’s stock.

On Friday, shareholders sided with Rohm, and with Nipponkoa, in separate company meetings, and voted down the proposals of the two U.S. investors. But the fact that two U.S. institutional investors were brazen enough to launch these shareholder offensives in the first place says a lot about the new tenor of the times – and is clearly a sign of the things to come.

Things have gotten so bad that even Toyota Motor Co. (NYSE ADR: TM) – held out as the “gold standard” of Japanese business practices – is doing the unthinkable. Honorary Chairman Shoichiro Toyoda recently summoned 400 senior executives to a red-brick building in Nagoya – the very same building where his grandfather had manufactured textile looms a hundred years ago, according to a report last week by Bloomberg. The managers had likely expected a typically perfunctory update. Instead, the 84-year-old company patriarch berated the assemblage and scolded them for making some of the same mistakes that steered two of their U.S. counterparts into bankruptcy.

Shock amongst attendees doesn’t begin to cover the reaction. “How many times have you made a mistake?” Shoichiro said to Katsuaki Watanabe, the Toyota president who the month before had been told he was being moved aside earlier than planned so that Shoichiro’s son, Akio, could assume command of the carmaker.

Shoichiro suggested that Watanabe was so anxious to boost sales and profits that he’d emulated General Motors Corp. (OTC: GMGMQ) and Chrysler Group LLC – both of which are now bankrupt. Toyota, like the two American carmakers, allowed itself to become “addicted” to big expensive cars and trucks and forgot about the customer’s needs to save money, added Shoichiro.

But as aggressive and “un-Japanese” as the actions illustrated by these few examples seem to be, they potentially don’t hold a candle to the most pressing of all investor groups demanding action right now: Millions of angry Japanese housewives want to know where their husband’s retirement funds went.
So what does this mean for the typical investor?

In the overall scheme of things, perhaps not much – at least, not yet. But stay tuned: Chances are good that if this “rebellion” continues, we could see true change here in Japan for the first time in centuries. And that may open the doors for some real investment opportunities and true forward-looking vision.
For those opportunities – and for the many lessons U.S. leaders (both corporate and elected) should take the time to learn from Japan’s experiences – it’s worth continuing to watch Japan.

You can be certain that we will. And we’ll keep you updated.

Source: How Japan’s Unlikely Shareholder Rebellion Could Lead to Profit Plays for Western Investors

[Editor's Note: Fourteen trades. All profitable. Since launching his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14, meaning he's closed every single one of his trades at a profit. And he did this in the face of one of the most-volatile periods since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index .] ]]> http://www.contrarianprofits.com/articles/how-japan%e2%80%99s-unlikely-shareholder-rebellion-could-lead-to-profit-plays-for-western-investors/18526/feed 0 http://www.contrarianprofits.com/articles/stronger-yen-will-hurt-sony-sne-and-toyota-tm/7218 http://www.contrarianprofits.com/articles/stronger-yen-will-hurt-sony-sne-and-toyota-tm/7218#comments Tue, 28 Oct 2008 12:22:55 +0000 Andrew Snyder http://www.contrarianprofits.com/?p=7218 The recent devastation in global stock markets makes US bears look relatively cuddly. Japan’s Nikkei index is hitting 26-year lows. And the resurgent Yen is creating even more problems for Japanese exporters. Andrew Snyder says companies like Sony (NYSE:SNE) and Toyota (NYSE:TM) face a very difficult period ahead.

More from Today’s Financial News:

Financial crises like the one we are enduring tend to have a mind of their own. While the talking heads on TV will quote historic recessionary trends or technical trading wisdom, their market wisdom is rarely wise.

Just as no two bull markets are the same, no two bears are alike. If they were, figuring out what will happen tomorrow, or the next day, or next year would be easy.

But…

– Other world markets India dropped 9.6% as Mumbai opened for business. South Korea fell as much as 9%, Hong Kong by 9.7%, Australia by 8.4% and in Singapore lost as much as 8.4%.

– European equities “collapsed,” according to the Financial Times, “left vulnerable after a dramatic late sell-off in New York extended the sustained losing streak on world stock markets.” London’s FTSE 100 sank as  much as 429 points to 3,884.6, a loss of 10%.

– US stock futures are pointing to another day of pain as sentiment hits new lows. “Dow industrial futures dropped 288 points. S&P 500 futures fell 35.4 points to 877.10 and Nasdaq 100 futures fell 28.2 points to 1243.80,” reports the WSJ.

– The WSJ calls it “a slow-motion crash” that has pulled the market down more than 20% over that brief period.

– Oil prices plummeted to a one-year low below $83 a barrel following the rout. “Light, sweet crude for November delivery was down $4.00 to $82.59 a barrel in electronic trading on the New York Mercantile Exchange by mid-afternoon in Singapore.”

– According to MarketWatch, “US authorities are considering radical new measures to shore up ailing financial markets, including guaranteeing billions in bank debt and insuring all US bank deposits for a temporary period.”

Backing all US bank deposits, a measure which is currently only at the discussion stage, would be aimed at preventing a further exodus of cash from financial institutions, including small and regional banks, The Journal reported. The move is being floated as banking customers have pulled money out of healthy community banks under the assumption that only deposits held at larger financial institutions would be backed by government guarantees in the event of a failure.

 

Removing the ceiling on deposit insurance would require multiple government agencies to agree that a “systemic risk” exists, thereby invoking a rarely used legal power. Some banking regulators say the move is justified following repeated efforts by the federal government to prop up ailing institutions.

– Gold futures climbed $36 to $922.50 an ounce.

– Bloomberg reports that “the yen headed for its biggest weekly gain in a decade against the dollar as the global stock-market rout caused investors to sell higher-yielding assets funded with the Japanese currency.”

– The euro traded at $1.3579, down from US$1.3661 late Thursday in New York.

– According to a  joint statement by the participating banks, “inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices,” while “the recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.” 

– Dollar Libor — the cost of borrowing in dollars overnight in London — had hit new highs prior to the rate-cut news. It was up 144 basis points to 5.38%.

– Yesterday, the Fed said it will double its cash auctions to banks to as much as $900 billion to help ease the liquidity crunch.

– The move came after Japanese stocks plunged 9.38%. It was the biggest one-day loss in more than two decades. The Nikkei-225 index dived 952.58 points to end at 9,203.32.

– Other major Asian indexes also got crushed. Hong Kong’s Hang Seng Index fell 8.17%. Indonesia’s Jakarta Composite fell 10.38%.

– US stock futures, however, are up after news of the rate cut lifted sentiment. According to MarketWatch, “stock market futures were volatile after the move: a big spike at first, then more moderate gains, and then another pick-up. At 8:10 a.m. Eastern, S&P 500 futures rose 22.8 points to 1,028.30 and Nasdaq 100 futures added 22 points to 1,358.50. Dow industrial futures rose 152 points.”

– In Britain, the rate cuts came after an announcement by the government there that Britain’s largest banks are to be part-nationalized. According to the Financial Times, however, “the scheme failed to stabilize shares in the UK’s biggest banks and the FTSE 100 fell another 223 points or 4.8 per cent to 4,382.5.W

– The fall in stocks has wiped out about $2 trillion in Americans’ retirement savings in the past 15 months.

– Gold is up for a third day in London as investors seek safety from plunging equities.

Despite Bush’s best efforts the National Retail Federation says US retailers will see their slowest holiday sales growth this year since 2002.

But it isn’t all doom and gloom in the retail world. Stephanie Grimmett says Japan’s Fast Retailing (PINK:FRCOF) has ambitious growth plans in fast-growing emerging markets. FRCOF’s share price is on a down trend. But it will likely bottom soon.

This from Today’s Financial News:

While the rest of the retail world is whimpering, writhing and contracting in pain, Japan’s Fast Retailing (PINK:FRCOF) is shopping around for a good takeover candidate.

Last year, the company, listed on the Tokyo Stock Exchange and traded on the Pink Sheets in the U.S., tried to take over Barney’s New York, but that failed attempt at expansion hasn’t thwarted the Japanese megabrand.

Fast Retailing operates the Uniqlo (as in, “unique-clothes,” I think.) chain, a store and clothing line as ubiquitous in Japan as The Gap is in the U.S., although Uniqlo’s design aesthetic is definitely younger, cheaper and more trend-conscious than its U.S. counterpart.

The company has 750 Uniqlo stores in Japan. And Fast Retailing plans to more than double the number of stores outside Japan to 125 outlets in the next two years.

When sales began to slip last year, chief executive Tadashi Yanai, who built Fast Retailing from a small family business, returned to oversee day-to-day operation. And the change was definitely felt in this year’s sales figures. Same-stores sales grew 2.9% in Japan, which is quite a coup in a saturated market with an aging population… not to mention the fact that retail isn’t exactly booming anywhere right now.

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It was unlike anything we’d ever seen…

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And now that retail in general is suffering, Yanai is shopping the sale aisle for local and international companies that can help push Fast Retailing’s revenues to 1 trillion yen (about $9.5 billion) by 2010.

Yanai is planning for new acquisitions to meet a quarter to a third of that goal. But he’s seen a slow start to his takeover fever. It’s been years since Fast Retailing announced it was on the buyout warpath, and yet, no buyouts have resulted. All we’ve seen is the loss of Barney’s in a bidding war and the failed attempt to snap up Hong Kong’s Giordano International. Still, that $1.4 billion sitting collecting dust is enticing for investors in a market where most of retail is shrinking instead of growing.

Fast Retailing is currently on a down trend as investors cash out their profits from the last six months. But keep an eye on the stock, as soon as you see it find a bottom, consider grabbing shares of your own.

Source: Japan’s Retail Champ: Buy Fast Retailing (FRCOF)

Ah yes, dear reader…the land of free markets and free men has become the land of the free lunch. Wall Street hustlers can make billions in bonuses – when the sun shines. As soon as it begins to rain, the losses are handed out to the general public. What kind of capitalism is this?

Oh, but you will say…AIG  (NYSE:AIG) is “too big to fail”…that if it were to collapse, it might take the whole financial structure down with it.

You might be right. AIG is a major financial player…and, specifically, a major player in the Credit Default Swaps market…said to be worth about $60 trillion. No one knows – the CDS market is not regulated or monitored. And no one knows what would happen if it went kafooey. But no one wants to find out, either.

Yes, again, dear reader…we’ve come a long way from when Andrew Mellon was Secretary of the U.S. Treasury in the late ’20s. When Wall Street cracked in ‘29, Mellon had the solution: let it happen!

“Liquidate the banks, liquidate the farmers, liquidate Wall Street…” Mellon was ready to let the chips fall wherever they might.

But four score years later, the chips are held up…cushioned…and caught by public nets by officials pretending to labor in the name of the public. Whether it is good or bad, we have no opinion. But it is certainly different. And it recalls to us that we were right about a number of things.

Ten years ago, we began to see a certain parallel between the United States and Japan. The latter was in a terrific slump…and American economists thought they knew why: the Japanese refused to let their big banks fail. Instead, they were propped up…causing the correction to happen in slow motion. Even today – 18 years after the Nikkei Dow collapsed – Japan has still not recovered. You can still buy stocks at 50% – 80% off!

We thought we saw the handwriting on the wall (in Japanese no less! We couldn’t actually read it, but we thought we knew what it said…): This shall be your fate too.

And here we are. Rather than allow the correction to take its natural course – and get it over with – the feds are doing all they can to prevent it. The risk of “systemic failure,” is too great, they say.

They must have stolen those words directly from the Japanese. That’s what they always said. And so the Japanese hunkered down and stretched out their recovery so long that people gave up on it altogether.

What will be the result of this big bailout of AIG? We don’t have to guess. We just have to look across the broad Pacific – at Japan.

If the Japanese model is what we think it is, the bailout – along with all the other props and cushions provided by the feds – will simply delay the inevitable. Stocks will sink. Smaller companies will go broke. Property prices will fall. Consumers will stop spending so much and begin saving.

That is what we expect for the United States too. But there is a major wrinkle; the U.S. can’t afford a Japan-style slump…and neither can your portfolio. There is still time to protect your hard-earned money – and still turn a nice profit…while everyone else are losing their collective shirts (and minds). Get all the tips your need on how to weather this financial disaster in the Strategic Financial Survival Library.

Source: The Land of the Free Lunch

We made sure to examine the situation — as well as the current state of Japan’s economy, the IPO market and the energy crisis — to help you make the most of these troubling times. Here’s this week’s wrap-up.

From South Ossetia with Love

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Here’s How to Bank on Japan’s Recession

Japan has conceded that its economy is “sort of in recession,” making it the fourth G8 member with a full quarter of “proto-recession” under their collective belt. The cold, hard fact is the Japanese market is stuck in long-term, mid-term and short-term down cycles. But there’s a way to make 82% while the Japanese government lets that sink in.

Read the full article here.

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Why the IPO Market Could Be Set to Explode

Things may look very still and calm from the outside; but on the inside, the pressure is rising and rising. It’s only a matter of time before something bursts. We discuss the hidden “pressure forces” building up in the new-issues market.

Read the full article here.

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The Energy Cold War, Part I: Seeing Through Russian Eyes

Russia looks intent on kicking off a new cold war. But unlike the 20th century, this cold war will revolve around energy instead of nukes. This conflict could have long-term implications for gas and oil, particularly LNG (liquefied natural gas). In Part I of our two-part discussion, we touch on Russian motives and perspectives.

Read the full article here.

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Sunny, 80 Degrees and Gorgeous. Time to Go Long Heating Oil!

Is our national nightmare finally over? The American Automobile Association tells us the average price at the pump is down some 40 cents to a mere $3.17 per gallon. What’s more, crude futures for September delivery are down to a paltry $112.93 a barrel. But before you completely write off this whole “oil spike” episode, you might want to think things through a bit…

Read the full article here.

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The New Energy Cold War, Part II: Missiles and Mafioso

We continue our coverage on the current state of Russian affairs by answering some of the reader responses to Part I. Some of the comments may surprise you… We also take a closer look at the puppet/master relationship between Russia’s freshly installed President Dmitry Medvedev and Prime Minister Vladimir Putin.

Read the full article here.

Emerging markets’ share of investment banking revenue has increased in both percentage share and in total value over the past few years.

Of course, if you want to buy into this dynamic growth business you need to invest in emerging markets investment banks. Martin has picked three that are worth a look…

In 2005, investment-banking revenue from emerging markets accounted for almost $40 billion, or 16% of the global investment-banking revenue total. Those figures increased to just over $78 billion, a 21% share of the total in 2007.

Emerging markets’ share of investment banking revenue will soar to 28%-30% by 2010, according to McKinsey Quarterly. And depending on how quickly the global financial markets recover, emerging markets will see investment banking revenue growth from $40 billion to somewhere between $90 billion and $115 billion in the five-year period of 2005-2010.

McKinsey’s overall thesis – that emerging markets are coming to represent an increasingly important source of investment banking revenues – appears correct. Emerging market economies are generally growing economically much faster than the West, so opportunities for companies are greater and an increasing proportion of the merger business is happening there.

With high Asian savings rates, current account surpluses, and the piling up of petrodollars, emerging markets represent much of the world’s savings pool. So, it’s not surprising that emerging market investment banking business is growing rapidly, both in absolute terms and as a percentage of the global total.

So we should all rush out and buy Goldman Sachs Group Inc. (GS), right?

Not so fast.

First, Goldman Sachs has had huge successes in a number of emerging markets, notably China, but its main business remains with U.S. and European Union companies, and that’s not going to change. Even if its emerging markets business were to expand, it could never be big enough to provide more than a modest uplift over the gloomy prospects for investment banking business domestically.

Second, Goldman Sachs and the rest of Wall Street are hopelessly uncompetitive in terms of costs and fees. They can be undercut, and fairly easily.

Wall Street firms have a habit of relying on superb connections to get the mandates and a dedicated team of top quality salesmen to sell the paper. But with emerging markets being largely separate from the United States and EU, the big Wall Street houses don’t necessarily have the local connections they need. And paper issued by emerging markets often sells to investors such as the sovereign wealth funds, which are again outside the normal Wall Street speed-dial.

Moreover, Wall Street bankers are hopelessly overpaid – recent graduates from the top business schools can start at around $200,000 a year. That makes a lot of emerging market deals off-limits, because they are too small to cover U.S. investment bank’s costs.

A merger deal that might make a $250,000 fee just isn’t worth their while – by the time they’ve put analysts onto it, found a buyer and done the legal work, they’re out of pocket. A $250,000 fee is small change to a U.S. or Western Europe investment bank, but in many emerging markets it represents a decent piece of business. What’s more, there are a far greater number of $250,000 deals around in those emerging markets then there are $2.5 million pieces of business.

Local traders and analysts, even with some years of experience, make a fraction of $200,000 Wall Street salaries. That means, for most business in emerging markets, local houses are likely to be much more competitive than their Wall Street brethren.

According to a report in The Daily Telegraph today, Japan’s gross domestic product contracted at an annual rate of 2.4% in quarter that ended June 30, after expanding 3.2% in the first quarter.

The news sent Japan’s Nikkei 225 down the most in a month.

Taipan Publishing Group’s Adam Lass says it’s a good time to short iShares’ Japanese ETF, EWJ…

Five years ago, the legendary Japanese exporting machine dragged the country out of its recession by flooding the U.S. (among other markets) with relatively cheap, reasonably high-quality products.

Unfortunately, U.S. consumers are in a bit of a funk right about now, so Japanese exporting is down 2.3%, leaving such mighty manufacturers as Toyota (TM:NYSE) with rapidly diminishing profits. And speaking of consumers, internal consumer spending represents better than 50% of Japan’s economic action. Unfortunately, spending fell 0.5% in the second quarter.

How are they taking all this in the land of the rising sun? If Dai-Ichi Life Research Institutes’ Hideo Kumano is representative, “The numbers are awful. Things are going to be very tough in the second half of the year.”

Since time immemorial, the usual response to a slowdown like this would be to crack open the central piggy bank and pump a little specie into the system, just to grease the wheels of commerce a bit. Unfortunately (as I have pointed out ad nauseum) this whole international crisis stems from the rabid overuse of national printing presses.

In this particular case, the Bank of Japan has not raised its target rate above 0.5% since 1995. This has created an incredible thirst for borrowed yen on the part of arbitrageurs, who would cart them off to places like the U.S. and EU where they could buy bonds with interest rates of an order of magnitude higher.

Now, however, this obscenely low rate has left the BOJ with no wiggle room whatsoever, now that it actually needs to inject some additional liquidity. As the fine details of the horror sink in the great herd mind, Japanese shares have burned off some 29%.

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And quite frankly, that only represents about half of what’s coming. An examination of the Nikkei 225’s chart reveals a Japanese market mired in both long-term, mid-term and short-term down cycles.

Overall this blue-chip index has been losing value since 1989. Drawing in a little closer, and one can see a double-top formation with an early high at 20,833 in April of 2000 and a lower high at 18,295 come July 2007.

Both of these highs were quickly followed by Comparative Average Sell Signals, with the seven-month average cutting under the 13-month average. The first instance was followed by a 41-month bear market. I see no reasons to presume that this cycle will be any different.

As I have mentioned repeatedly, bear markets are normal natural parts of the great economic ebb and flow. They are also an excellent opportunity for dramatic gains — if you are willing to stretch your minds a little.

At Taipan’s recent San Francisco conference, I pointed out that iShares’ Japanese ETF, known as the EWJ, mimics the Nikkei reasonably closely, allowing a trader so inclined to play put options against the broad Japanese decline without ever actually leaving the safety of the American marketplace.

Specifically, I recommended EWJ January 12 puts (EWJ ML), which have already gained some 22% in the few short days since the conference. Should the Japanese blue chips fall another 12% (the highest of my three predicated targets!) over the next few weeks, these calls stand to gain another 82%.

Source: Here’s How to Bank on Japan’s Recession