London , England

We got back from South America on Friday… ready for a rest. So, we spent the weekend reading… and occasionally, thinking.

What we’ve been thinking is that the dollar is dead meat in the long run. But in the short run, it might have enough life in it to bite investors on the derrière.

The US stock market rose 73 points on Friday, to bring the Dow just 30 points south of the 10,300 mark. Why is this level important? It’s not really. But it reminds us that this is still just in “bounce range.” Big drops in stock prices are followed by bounces – always. A bounce of 50% of what was lost is not unusual. That’s what happened after the Crash of ’29, for example. So, there’s nothing exceptional about what we’re seeing on Wall Street.

But here at the Daily Reckoning we’re not smart enough or fast enough to play the countertrends. We want investment positions that we can ignore for years… We want to be able to go on a long trip… say, down the Inca Road or over the Hindu Kush. And when we come back, we want to find that we have at least as much money as when we left.

If stock market buyers – in the US – have more money a year from now than they have now, we’ll be surprised. The private sector is still more than 2/3rds of the economy. And the private sector has begun de-leveraging. Nothing that has happened in the last 8 months makes us think that that trend is going to reverse any time soon. There are 70 million baby boomers who need money for retirement. They’ve got to save. That means cutting back on spending. And that means less income for business. Are stock prices really going to go up when business income is going down? No.

We leave our “Crash Alert” flag flying, here at the worldwide headquarters. We don’t know when… or IF… stock prices will crash. But the downside risk is not worth the possible upside. Daily Reckoning readers should be out of all US stocks, except those they wouldn’t mind holding through a 50% correction.

The other thing we mistrust – aside from politicians, stock promoters and tap water – is the dollar. But here the story is more complicated. Because the next downswing in stocks could push the dollar up! Everyone is betting against the dollar. And most think it is a one-way gamble. But it’s not like Mr. Market to grant investors a one-way bet. He’s got something up his sleeve.

Last week, the Financial Times reported that a group of IMF economists had made a “Plea to reduce demand for dollar reserves.”

That is another way of saying: find something else to put in your vaults rather than dollars!

To read the complete article at The Daily Reckoning, click here.

The Dow rose again yesterday – up 44 points. Gold went up too – to a new record of $1,114.

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

“It’s amazing, the US is doing everything that Japan did wrong,” said a friend yesterday.

Let’s see… in the 1980s Japan’s corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the ‘80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights.

For example, instead of saying that businesses always need to try to do things better, they referred to “kaizen” as if it were the secret of success.

And US economists urged the Reagan Administration to have an “industrial policy” – because that was what Japan had.

Japanese businesses were the envy of the world. Japan was the world’s second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall.

Click here to read the rest of Mr. Bonner’s article.

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

The investment, which will be made through the group’s Sumitomo Mitsui Banking Corp. unit, underscores an evolving trend among large Japanese banks that have so far been unaffected by the subprime collapse.

Sumitomo Mitsui, Japan’s second largest bank, has not confirmed the agreement, but its 100 billion yen investment will secure an approximate 2.3% stake in Barclays. Barclays was racked by the housing collapse that started last year and has since dragged the U.S. economy to near recession. Barclays’ stock dropped 40% so far this year, as the bank took $3.35 billion in write-downs.

Last week, Barclays said it would seek out $7.8 billion in fresh capital from sovereign wealth funds, in a fresh share offering. Singapore’s Temasek Holdings, China Development Bank, and the Qatar Investment Authority are among the sovereign wealth funds reported to be interested in Barclays.

“This fixes the problem quite neatly for them,” Mike Trippitt, a banking analyst at Oriel Securities told The Independent. “They are signalling that at the moment there don’t seem to be any further writedowns. If you have got sovereign wealth funds buying in with a medium-term view you might argue that it signals some visibility.”

Barclay’s ratio of Tier 1 capital, a measure of financial strength, was at 5.1% at the end of 2007. Raising $8 billion would lift it to nearly 6%, analysts said.

Banks and securities firms have raised about $303 billion in the past year after almost $400 billion of write-downs and credit losses caused by the collapse of the U.S. subprime mortgage market, according to Bloomberg data.

Sumitomo Mitsui would be the second major Japanese bank to participate in the rescue effort of a Western financial institution struggling to emerge from the subprime crisis.

“This indicates that Japanese banks are in a safer position than their global peers and have surplus capital to invest,” Masafumi Oshiden, a Tokyo-based fund manager at BlackRock Inc. (BLK), told Bloomberg. “It’s a good move for them and I’d like to see them being even more aggressive.”

In January, Mizuho Financial Group pumped $1.2 billion into Merrill Lynch & Co. Inc. (MER) through the purchase of preferred shares. And many analysts believe there is more investment to come as Japanese banks, which find themselves in a relatively strong position, become more assertive with their overseas acquisitions.

“Under these circumstances I think that Japanese financial institutions are in a position to take an aggressive attitude… it is a change that should be very much welcomed,” Yoshimi Watanabe, Japan’s financial services minister, told the Times Online.

Source: Barclays Gets a $927 Million Jump Start as Japanese Banks Ramp up Overseas Investment

“Our judgment is that our current stance on monetary policy, under current conditions, is the best,” Bank of Japan (BOJ) Governor Masaaki Shirakawa told reporters at a press conference in Tokyo.

While President Jean-Claude Trichet of the European Central Bank (ECB) and U.S. Federal Reserve Chairman Ben S. Bernanke have taken a hawkish stance on inflation in recent days, Shirakawa felt it was not yet time for the BOJ to tighten its monetary policy. Trichet has even suggested the ECB could raise rates as early as July.

“People took it that he wasn’t joining on the hawkish axis that we’ve been hearing from the two other G3 central banks,” David Cohen, director of Asian economic forecasting at Action Economics in Singapore, told MarketWatch, referring to the recent anti-inflation rhetoric from central bank governors in the U.S. and Europe. “He didn’t appear to be shifting to a tightening bias just yet, still being focused on the weakening in the economy as their immediate concern.”

Shirakawa noted the effect high oil and commodity prices are having on the economy and said that Japan’s current expansion could be over as company earnings suffer under the current global economic environment.

“We must watch the downside risk that deteriorating terms of trade will erode incomes and hurt domestic demand,” Shirakawa said after today’s policy decision. “We need to monitor upside risks for prices relating to consumers’ inflationary expectations and companies’ price-setting actions.”

Derivatives are pricing in about a 95% chance of a Japanese rate hike by the end of this year, according to Reuters data, as the country is faced with the terrible prospect of stagflation caused by rampant inflation coupled with poor economic growth.

“The Bank of Japan has no choice but to take a wait-and-see stance,” Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, told Bloomberg News. Economic conditions “rule out the possibility of raising rates, while a rate cut is difficult because the governor has repeatedly said monetary conditions are accommodative.”

Source: Bank of Japan Plays Down Inflation Concerns

Major department stores like Takashimaya Co. Ltd., Sogo Co. Ltd. and Mitsukoshi Ltd. are gearing up. In places like Tokyo, Osaka and Kyoto, they’re seeing a new wave of power shoppers at their counters – the Chinese.

A few short years ago, this was unthinkable.

Yet, as my wife and I strolled through downtown Kyoto, we saw it too. Most major department stores have added Chinese signage to the usual Japanese and English placards.

We heard it, as well, from Chinese shoppers who were tromping through the Shijo-Kawaramachi shopping district loaded down with bags sporting the latest designer logos. It’s much the same in Tokyo’s uber-rich Ginza district as well where Mitsukoshi has recently hired store-based interpreters fluent in Mandarin.

I can’t say I’m surprised.

According to the Japanese Department of Tourism, a record high of nearly a million Chinese tourists came to Japan last year. China’s Ministry of Public Security estimates that 34.5 million Chinese headed for foreign destinations in 2006 – up from a mere 4.5 million a year earlier. By 2011 that figure is expected to top 80 million with Hong Kong, Macau, Vietnam, South Korea and Japan predicted to account for 85% of all Chinese tourist destinations according to Euromonitor International.

And they’re spending big bucks, too.

CNN reporter, Kyung Lah, interviewed one group of mainland Chinese tourists recently that had spent $50,000 dollars on clothing and makeup alone on a 3-day trip. Not surprisingly, most of that was on designer brands from Prada Group, Gucci Group NV (PINK: GUCG), Christian Dior SA, and Shiseido Co. Ltd. (OTC: SSDOY).

Which jibes with my personal experience as indicated by Chinese and Japanese I’ve spoke with over the years. Whereas most of them used to only dream about traveling, an increasing number are actually doing it. My good friend Jun Hao and his wife have hit most of Europe’s major cities and a good deal of the United States, too.

Getting back to Japan, however, it may surprise you to learn that most Chinese feel very comfortable there. A fact that stands in stark contrast to how relations between the Japanese and Chinese are often portrayed in the Western media.

It’s now a common sight in Tokyo to see Chinese who are shopped out make a beeline for Toyota Motor Corp.’s (ADR: TM) showrooms. Obviously, they’re not buying Toyota’s in Japan, but boy are they anxious to buy Toyota’s in China.

And a visit to the showroom is just what the doctor ordered for young, cosmopolitan Chinese yuppies… or “Chuppies” as they’re called.

Not only do they feel more international for having done so, but Chinese tourists tell me they find Japan quite welcoming. And warm, which is another one of those words than can be translated a variety of ways.

Not one citizen of China or Japan that I’ve recently spoken with believes that the political past between their respective countries would prevent an economic future.

Investors looking to capitalize on the blossoming relations between the two countries and the tourism trade specifically need to look no further than Japanese department stores, Chinese credit card companies and, ironically, Toyota to get in on the action.

Of course, there are obvious choices when it comes to computerized travel providers and airlines.

But the value there may be harder to extract given there’s not a clear value proposition and the industry remains largely fragmented… for now. And that’s part of what makes Money Morning’s growth “because” of China – and Japan – investing strategy the way to go for now.

Source: Japan Makes Way for China Tourist Money

Senior officials say the economy has become much more stable as it has plugged into the booming economies of Asia, exporting everything from consumer goods to machine tools. But not everyone is convinced, with some worried that as Asia slows in response to lower exports to a recession-hit US, Japan’s exports will suffer, as will its consumers, whose spending will be hit by higher fuel prices.

“Japan is cheap in a way that no other developed markets are,” says Merryn Somerset Webb in Money Week.

“A good 50% of Japanese stocks trade at less than their book value (the accounting value of their assets), for example. Dividend payouts are also rising. They have always been stingy, when they have existed at all, but over the past three years, the dividends offered by the biggest companies have been rising at double-digit rates.

“And the economy isn’t doing badly at all. In the fourth quarter of last year, Japan grew at an annualised rate of 3.5% and in the first quarter of this year the numbers are expected to show that it grew at around 2.5%. Given that the best the US can do is 0.6% (and that number is bound to be revised down over the next few months), that looks pretty good.

“Japan is currently the world’s fastest growing developed economy and given its links to Asia (twice as many Japanese exports go to Asia than to the US), it is likely to stay so.”

“The EU should be working with the United States to promote new technologies, not finding protectionist gimmicks to apply new duties to these products,” US Trade Representative Susan Schwab said to Thomson Reuters.

“Investors may have fled the US dollar, and watched the eurozone grow relatively fast against its lagging American counterpart,” says Jody Clark in Money Week, “but they’ve ignored the hidden weaknesses on this side of the Atlantic.

“This year’s first-quarter GDP growth across the eurozone flipped up a good 0.7%, but that figure was skewed upwards by the rollicking performance of the German economy. German GDP growth climbed 1.5% on the back of a roaring manufacturing base oiled by booming exports. In contrast, Italy only managed expansion of 0.4% and Spain 0.3%, while in Portugal, growth actually fell by 0.2%.

“Meanwhile, inflation is on the rise, led by a good 4.6% in Spain and 5% in Ireland. Both are well outside the ECB’s 2% target. The spectre of stagflation – a stagnant economy plus rising inflation – is rearing its ugly head. Indeed, ’stagflation is a situation that we experienced some years ago, it could return,’ said Spain’s Economy Minister Pedro Solbes earlier this month.”

The US should get its house in order too, says Chuck Butler in The Daily Reckoning.

“The currency markets do not like any form of protectionism, and a country that puts protectionism in place usually sees the currency suffer.

“So, think about this for a minute… We have an election process going on in the United States that will come to a head in November, which is six months away. During that six months there will be candidates taking shots at OPEC and China (the two main ‘outside’ culprits of the trade deficit… But we would never go after the US consumer and tell him to save instead of spend now would we?)”

Sony Corp., which gets a quarter of its sales from the U.S., sent electronics makers higher, while Canon Inc. jumped the most in a month. Mazda Motor Corp., which exports 80 percent of domestic production, led a gain by carmakers after the yen weakened against the dollar.
The Nikkei 225 Stock Average climbed 415.03, or 3 percent, to close at 14,124.47, the sharpest gain since April 2. The broader Topix index jumped 31.94, or 2.4 percent, to 1,380.63. All but one of 33 industry groups on the index advanced.

“For investors, one of the biggest profit opportunities will be with companies that are helping China build out its infrastructure and build up its consumer sector,” says Keith Fitzgerald in Money Morning, “which is why such companies as solar-ceramics maker Kyocera Corp. (ADR: KYO), and trading giant and independent power plant developer Mitsui & Co. Ltd. (ADR: MITSY), are logical choices.

“In addition to seeing Japanese companies like these focusing their sights on the China market, we’re likely to see Chinese companies doing the same with Japan. While it’s not yet clear who those companies will be, it is clear to us that the initial entrée will likely be from one or more of China’s sovereign wealth funds.

“Our best guess is that China investors will prefer key targets like those traded on the Tokyo Stock Exchange – especially companies that have an expertise in environmental protection and energy-saving technologies. We also think China will make a run at construction companies with experience in large-scale infrastructure and national-building projects – all of which are in exceptionally high demand in China.”

“Economically, China and Japan have much to offer each other,” says Martin Hutchinson in Money Morning.

“Both have shortages of raw materials and strong manufacturing sectors. However, the relative shortage of labor in Japan’s aging society, its superb education system and the surplus of labor in China all combine to make them natural partners. Already, Japan is China’s second-largest trading partner, taking 10% of its exports and supplying 15% of its imports. Conversely, China in 2007 surpassed the United States as Japan’s largest trading partner, taking 14% of its exports and supplying 21% of its imports.”

Based on my 20 years of experience in the region and formal academic study, you can believe me when I say that this may well be the most pivotal event in 20 centuries of Sino-Japanese relations.

We’ve reported some of this to you already. But the mainstream Western press hasn’t latched on to it.

That’s not to say they haven’t reported what happened when Japanese Prime Minister Yauo Fukuda hosted Chinese President Hu Jintao during the historic summit the two held in Tokyo last month – the press reported everything that “happened,” and did so exceptionally well.

However, like so many things in Asia, mainstream journalists completely missed the subtleties and, not surprisingly, that’s where the real story usually is.

But you’ve got to know how to read between the lines to get at the “real” meaning of what was said.

Here’s why.

When translating both Chinese and Japanese to English, there are both literal and figurative translations to consider. Frequently, inexperienced commentators (and even experienced ones) will provide one without the other.

And that’s too bad, because it’s the context that’s “everything” in Asia – and I mean that literally.

Unlike Western romance languages – which descended from the resconstructible Proto-Indo-European language family, and which are logically oriented – Chinese languages are commonly believed to have descended from the Proto-Sino-Tibetan family while Japanese is understood to have come from a context-driven lexical borrowing process in the region.

As a result, Western languages are frequently blunt and to the point, while both the Japanese and Chinese languages historically rely heavily on context and symbolism: In other words, the “real” meaning is not the words, but is instead found in the symbolism associated with those words.

And that’s not exactly something you can explain in a 10-second CNN sound bite, so most news stations don’t bother.

For instance, during their historic five-day Summit last month in Japan, Prime Minister Fukuda and China President Hu agreed to make 2008 a year for boosting their nation’s “mutually beneficial relationship.”

I was sitting in Kyoto when I heard that, and I was stunned. I’ve spent two decades studying, living in and working in Asia, and in all that time I couldn’t recall any of the prior leaders of the two countries ever sharing a more-direct, more-powerful statement. And neither could the Chinese and Japanese I spoke with that day because the words represents the single most important thaw yet verbalized in the decades old animosity dating back to World War II.

While most Westerners expected them to “settle affairs” by making some reference to historical events that have badly strained bi-lateral relations in recent years, both leaders deliberately avoided doing anything like that during their five-day meeting. And, by doing so, each side was able to state his case to the other’s countrymen without “losing face,” which is pivotally important to both countries and cultures.

Similarly, President Hu’s remarks that he’s looking forward to a “warm spring” between the two countries were translated quite literally by the Western media, although the comment had an entirely different meaning to Asians. To Asians, the comment is symptomatic of far deeper, and more intimate, nationalist feelings on a variety of personal and state levels.

By stating his desire for a “warm spring,” President Hu was making an allegorical reference to the importance of producing a bountiful rice harvest. And the reason why this makes sense to Asians is that rice has been pivotally important to both cultures for a millennium or more. That crop has enabled both cultures to make the transition from hunter-gathers to farmer, and it is also central to religious and social festivals in both countries, as it has been for thousands of years.

By referencing rice farming, President Hu was very deliberately reaching deep down into the core of both nations and sending an important message to millions of Japanese and Chinese citizens that China is ready to put the past to rest and look to the future.

In a more Western fashion, the two leaders also agreed that “long-term cooperation for peace and friendship” is the “only choice left” for both countries. This, too, is full of hidden meaning: It’s an unprecedented signal that both nations are preparing to (finally) put the horrific events – and the long-lingering bad feelings – of WWII behind them.

By putting this rancor to rest, each country will now be free to make major investments in the other’s economy – much more so than they’re doing even now.

If history is any guide, then some of the most significant Sino-Japanese trends of the future are likely to begin at the intersections of companies just now starting to flourish.

Of course, there will be course corrections along the way, but that didn’t hurt relations 20 centuries ago when Japan and China were very close – and those corrections won’t hurt them, now.

The important thing is to embrace change as it occurs.

For investors, one of the biggest profit opportunities will be with companies that are helping China build out its infrastructure and build up its consumer sector, which is why such companies as solar-ceramics maker Kyocera Corp. (ADR: KYO), and trading giant and independent power plant developer Mitsui & Co. Ltd. (ADR: MITSY), are logical choices.

In addition to seeing Japanese companies like these focusing their sights on the China market, we’re likely to see Chinese companies doing the same with Japan. While it’s not yet clear who those companies will be, it is clear to us that the initial entrée will likely be from one or more of China’s sovereign wealth funds.

Our best guess is that China investors will prefer key targets like those traded on the Tokyo Stock Exchange – especially companies that have an expertise in environmental protection and energy-saving technologies.

We also think China will make a run at construction companies with experience in large-scale infrastructure and national-building projects – all of which are in exceptionally high demand in China.

Source: The Subtle Dealings Between China and Japan Can Lead to Powerful Profits