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

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Even worse – for anyone who was feeling optimistic about that market, the sharp decline in the prior quarter’s GDP was revised upwards, as well.

Japan’s embattled prime minister, Taro Aso, who came to office in September just as the downturn was beginning, has introduced several stimulus programs of extra public spending, but nothing seems to work. The stock market is trading lethargically at a level that’s about 80% below its 1990 high. And there’s an election that has to be held before September.

It’s not a pretty picture.

The Japanese are well aware of this; they were not particularly cheerful about their economy even before the present downturn.

There’s actually a great Japanese movie that I watched last weekend, called “Bubble Fiction,” that illustrates this very well. In the 2007 film, a young girl is down-on-her luck, deeply in debt, and being harassed by yakuza (organized crime) debt collectors. She goes back in time to 1990, in an attempt to stop the policy mistakes that burst the Japanese bubble. Back in 1990, she finds Tokyo a much more fun place, with money everywhere and everyone happy – she even meets her yakuza debt-collector, who is graduating from Tokyo University, and who has lined up a great job with the Long-Term Credit Bank of Japan Ltd. (which went bust in 1998).

Eventually, with the help of a buddy in the Ministry of Finance, she gets to the top guy in the Ministry whose policies caused the crash, and discovers that it is all a plot between him and some rich foreigners, who plan to become billionaires by exploiting the destruction of Japan’s economy. She foils the plot, returns to 2007 – and finds it magically changed, in a long burst of prosperity, with no government debt and her Ministry of Finance buddy just appointed prime minister.

So that’s the Japanese fantasy – to find some way to undo the malaise of the past 20 years and make the country’s economy work properly again. To some extent, Junichiro Koizumi, prime minister from 2001-06, played into that fantasy. He sorted out the banks, started to privatize the Japanese postal system and cut back on wasteful government spending. It seemed to be working, too, as Japan began to enjoy decent – albeit modest – growth again.

Since Koizumi left, however, the governing Liberal Democrat Party (LDP) has abandoned his policies, and current Prime Minister Aso is very much a part of the problem – and not the solution.

Whatever you think of “stimulus” strategies, there can be no question that it is the least likely to be effective in a country that already has a large budget deficit, and that already has public debt that’s more than 160% of GDP. If the Japanese economy is currently in a pit, Aso’s policies are creating a much deeper bottom.

Just last weekend, the opposition Democratic Party of Japan provided a genuine alternative. Its previous leader, Ichiro Ozawa, was an authoritarian personality who had formerly been a senior member of the LDP, and who had shared many of that party’s more unpleasant traditions. He was forced out by an election-funding scandal and the new leader, Yukio Hatoyama, is a milder personality, and a person who appears to offer a genuine alternative.

In his acceptance speech Monday, Hatoyama emphasized “sweeping away wasteful uses of tax money” and “moving from [a] bureaucrat-led to [a] citizen-led government.” He also denounced “amakudari” – the “descent-from-heaven” process by which top bureaucrats become powerful private-sector oligarchs.

The DPJ is an amalgam of LDP rebels and moderate members of the old Japan Socialist Party, and its basic philosophy has a plank of opposing “bureaucrat-led protectionism.” It is currently leading in the opinion polls, and with Hatoyama as its leader may well appeal to the Japanese longings embodied by “Bubble Fiction.”

All of this gives the DPJ a good chance of succeeding in the Diet elections, which must be held by Sept. 6, meaning Hatoyama & Co. would form the next Japanese government.

If Hatoyama does, indeed, clean out the bureaucratic deadwood and cut public spending – while at the same time restraining those on his left who will want more-extensive social programs – he will have an excellent chance of bringing the Japanese economy out of its 20-year downturn and restoring it to its former glorious technology-led growth.

That would cause a huge rebound in the Tokyo stock market, from which we should be poised to profit.

A lot can go wrong. But at current levels, the Nikkei 225 surely cannot go much lower, and Hatoyama now appears to offer a chance of restoring 1990, or at least the early 1980s, when the Japanese market was the best investment in the world. It must be worth a modest investment in the largest Japan ETF, the iShares MSCI Japan index (NYSE: EWJ).

At current levels, EWJ is sporting a Price/Earnings (P/E) ratio of 17, but that’s based on earnings in the recession – before the Time Machine takes off!

In Spite of a Grim Economic Outlook, Japan is a Promising Investment Play

Despite the disturbing news from Japan – the world’s second largest economy – some analysts are optimistic that the record gross domestic production (GDP) decline may be the low point, with business activity picking up from here.

“There was a collapse across the board,” Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo, told Bloomberg News. But there’s “light at the end of the tunnel,” he said, adding that he believes the economy will rebound this quarter as companies replace inventories and stimulus plans begin to take effect.

Prime Minster Taro Aso has set forth the largest stimulus plan in Japanese history, promising to pump $160 billion into the economy, mostly geared towards lifting consumer spending, which accounts for about 55% of GDP.

Japanese consumers were the biggest factor in the decline. Consumer spending fell 1.1%, trimming 2.6 percentage points off GDP – the most since 1974, Bloomberg reported.

Analysts say that declining exports are a big reason for the decline in consumer spending.

“The export plunge is spreading to domestic demand,” BNP Paribas SA (OTC: BNPQY) economist Hiroshi Shiraishi told Reuters. “As such, the Japanese economy may return to growth temporarily but it could suffer a contraction again afterwards.”

Net exports – the trade gap between exports and imports – shaved 1.4% off overall economic output.

Toyota Motor Corp (ADR NYSE: TM), Hitachi Ltd. (ADR NYSE: HIT), and Panasonic Corp. (ADR NYSE: PC) all projected mounting losses for fiscal 2009. Panasonic said last week it plans to close about 20 factories this year and cut 15,000 jobs. Hitachi will slash spending by $5.2 billion this year and shed 7,000 workers, Bloomberg reported.

Still, there are faint signs of recovery in both exports and consumer spending, triggering cautious optimism among some analysts and government officials. Consumer confidence jumped to a 10-month high in April and exports increased in March over the previous month.  Factory output also jumped for the first time since September as companies cut inventories.

The Wall Street Journal reported last week that Honda plans to increase production in Japan this quarter as dealers have begun clearing inventories.  Car sales may have “bottomed” in Japan and the U.S., Fuji Heavy Industries Ltd. (ADR OTC: FUJHY) President Ikuo Mori said in Tokyo, according to Bloomberg.

“While the economy will continue to be in a severe state, I expect less pressure from inventory adjustments and the stimulus package to provide support,” Economy and Fiscal Policy Minister Kaoru Yosano said after Wednesday’s report, Bloomberg reported.

Source: Japan GDP Falls to Record Low but May Have Bottomed

Japan’s exports for February were down a shocking 49.4% on a year-over-year basis. The Japanese economy suffered a fourth-quarter decline of 3.2% – twice the decline of its U.S. counterpart – and is expected to drop by a similar amount during the current quarter.

What went wrong? And, for us investors, are the low current prices of Japanese stocks a buying opportunity or a trap?

Partly because of its efficiency and my fondness for sushi, I have always been inclined to favor Japan and Japanese investments. In 1989, it was obvious that the market was overvalued and I said so – in the process alienating several of my friends who thought they had found safe career niches managing investment funds investing in Japan.

In the 1990s, it was obvious that whatever Japanese governments were doing didn’t work, so I welcomed the 2001 arrival of Junichiro Koizumi as prime minister, and from there wrote frequently about Japan’s growth prospects – until last year.

Until August last year, it looked as though I would be right in the long run, even if the Japanese stock market tended to droop. Since September, however, it has all gone wrong; Japan’s economic performance has gone from adequate to truly dreadful.

Pinpointing the date enables us to pinpoint the reason. In September, Japanese Prime Minister Yasuo Fukuda, who had supported Koizumi’s policy of public-spending restraint, resigned and was succeeded by Taro Aso, still of the long-governing Liberal Democrat Party (but from its opposing faction). Aso is an enthusiastic proponent of “stimulus” public spending programs, particularly on public works in rural constituencies. That’s the policy that notably failed to conquer recessionary conditions in the 1990s, leaving Japan with a public debt equal to 160% of gross domestic product (GDP).

Aso has already proposed four stimulus programs, raising Japan’s budget deficit from 3% of GDP in 2007-2008 to an estimated 11% of GDP in 2009-10. The public debt/GDP ratio is rocketing upwards, because of public borrowing and the decline in GDP. Interest rates, which had been rising gently towards normal levels in 2006-08 (though short-term rates had only reached 0.5%), have been reduced to zero again and the Bank of Japan (BOJ) has begun “quantitative easing” – buying up government debt.

Currently, there’s a general agreement among Western politicians that these are the policies to follow. So why haven’t they worked in Japan?

At this point, the London merchant banker in me is irresistibly tempted to snarl: “Because they don’t (expletive-deleted) work in general.”

My own preference is for balanced budgets, low public spending and high interest rates – you may not get much economic growth with those policies, but what you get you’ve earned – without burdening your grandchildren. Even now, some countries – such as Brazil – are following those policies, and doing quite well.

Setting aside the question of whether stimulative policies work in general – within a year or so we shall have tested them exhaustively in the United States and most of the western world – I do think there may be reasons why they work particularly badly in Japan. Japan has traditionally had very high savings rates; it still has a limited Social Security system and an aging population. Low interest rates may well therefore damage demand from consumers living off savings more than they boost demand by helping companies and other borrowers. While low interest rates boost exporting companies, that boost may simply raise the yen exchange rate to a level at which in a recession exports fall catastrophically.

As for budget deficits of 11% of GDP, if you already have a public debt in excess of 160% of GDP, you may well be at the point at which the extra debt and the uncertainty about how you are going to pay it all back eliminate any boost to demand that the budget deficits would normally bring.

It is thus clear that Aso’s policies will work less well in Japan than they would elsewhere. Indeed, they may make matters worse in Japan, even if they would be effective in some other countries.

Japanese voters will have a chance to choose something different at a Diet election due in September or before. The bad news is that, while the opposition Democratic Party of Japan is theoretically pro-market, its leader, Ichiro Ozawa, in practice is a former LDP stalwart, of the faction founded by 1970s’ kingpin Kakuei Tanaka that favored heavy public spending.

Furthermore, many of Ozawa’s supporters, from the former Social Democrat party, also favor heavy public spending, albeit on different things than the LDP barons. In other words, an Ozawa victory may not bring much of a policy change, at least on economics. What’s more, Ozawa himself has now been caught up in a campaign-fund scandal, so even though Aso’s popularity ratings are down to around 10%, the LDP still may win – which would boost Aso at the expense of the free-market Koizumi supporters.

The bottom line: In the election this year, if the Japanese people want the economic policies that seem to work, they will have to be damn clever about it. There are many supporters of free-market policies in both the LDP and the DPJ, but they are not currently represented among the leadership of either party.

Japan remains a country in which everything works beautifully – except the politics. But the country is still worth keeping an eye on, though, because if the politics change, the potential from a Japan with higher interest rates and lower public spending is absolutely gigantic.

Source:  Investing in Japan: Lots of Potential, Little Growth

– “The once unthinkable prospect of zero interest rates moved closer to reality yesterday,” says The Times. “Interest rates going to zero in our heroic struggle to become Japan,” says Henry Blodget on Clusterstock.

– Even Japan is racing to become the next Japan. Today, Japan announced it’s joining the global bailout bonanza. Prime minister Taro Aso says he will pump $275 billion of public funds into world’s second-largest economy. This will go toward expanded credits for small businesses and a cash payback to every household.

– Uncle Sam is also considering spreading more government-funded love around, too. This from the NYT:

Senior Bush administration officials are discussing a plan that could help up to three million homeowners struggling to pay their mortgages to stay in their homes, three people briefed on the proposal said Wednesday.

The initiative could be the most sweeping government effort directed at mortgage borrowers since the financial crisis began last year. Under the plan, the government would agree to shoulder half of the losses on home loans if mortgage companies agreed to lower borrowers’ monthly payments for at least five years, according to the people briefed on the plan who asked not to be named because details were still being negotiated.

– U.S. stock futures pointed to strong gains this morning ahead of data that will likely show that GDP is contracting — further evidence, if any were needed, that Mr. Market doesn’t give a hoot about the ‘real’ economy. Yesterday the Fed handed the market another rate cut. And there’s nothing the market loves more than a rate cut…all that easy money to play with.

– “Talk about priming the pump for the next bout of excessive exuberance,” says a commenter on Paul Kedrosky’s Infectious Greed blog. “If the next big problem isn’t hyperinflation, it will mean that we have crashed and burned. I believe there is a movie called No Way Out that basically says it all! Nothing good can come out of where we are at the present moment economically.”

– We’re already seeing a massive rally in commodities, just one day after the Fed cuts. “Gold, crude oil and corn extended the biggest surge in commodity prices in five decades on speculation interest rate cuts in the U.S. and China may revive demand for raw materials consumption,” reports Bloomberg.

The Reuters/Jefferies CRB Index of 19 raw materials jumped 5.9 percent yesterday, the most since at least 1956, when the data begin. The index is still down 24 percent this year. China, the world’s largest industrial-metals user, trimmed interest rates for a third time in two months, and the Federal Reserve slashed bank borrowing costs in the U.S., the biggest oil user, to 1 percent.