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Why Japan is Still One of My Long-Term Plays…

Mar 4th, 2008 | By Eric Roseman | Category: International Investing

The Sovereign Society might not be universally bullish on stocks in 2008, but we sure love Japanese equities at these levels. Both Mike Burnick and I continue to recommend Japanese stocks - the only major market in the world we view as offering compelling absolute and relative values.

It’s true, that I’ve been too early recommending Japanese smaller companies up till now. Despite amazingly low multiples and generally, strong corporate earnings, Japanese small-caps have not rallied so far. But still, no other global index is cheaper than Japanese smaller companies, and they’re now trading below book-value. From its high three years ago, the Tokyo Second Section Index has plunged more than 50%.

jsc russell nomura small cap japan graph
Japanese smaller stocks rely far more on consumption trends affecting the local economy. Large caps require a steady diet of export competitiveness, now diluted somewhat by the yen’s big surge since last fall, amid the slow demise of the now infamous “carry trade.”

For small-cap bulls, another bullish consumer spending report emerged last week. The report shows consumption grew to 3 ½ year highs, despite rising prices and stagnant employment growth. Household spending grew 3.6% from a just year earlier. That’s a surprise considering the slowdown affecting exports since the emergence of the U.S. economic slowdown last fall.

Japanese consumer spending is responsible for about 50% of GDP. Any marked improvement in domestic consumption is therefore bullish for smaller companies and corporate earnings.

At this point, amid a bear market for global stocks, it’s hard to forecast when Japanese smaller companies will rebound. They’re unbelievably cheap at this point. Long-term investors should view Japanese small-caps as a cheap option with no expiration.

It might take another several months or longer, but eventually, smaller companies in Tokyo will rebound with a mighty 100% rally or more, if history is any guide.

ERIC ROSEMAN, Investment Director

P.S. In our member’s only newsletter, The Sovereign Individual, I’ve recommended several ways to play this coming rally in Japanese small-caps - both offshore and right through your discount broker here in the United States. Those are just two of many investments, our entire team of investment experts recommend each month in our 16-page, investment-packed newsletter. Click here to try a risk-free trial to The Sovereign Society, so you can get the next 12 issues of The Sovereign Individual for our lowest rate ever.


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By Eric Roseman

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Eric RosemanEric serves as an editor and Investment Director for The Sovereign Society's Commodity Trend Alert. Eric's talents include blending a dozen or more alternative investment funds to produce consistent returns to traditional asset classes and making commodity based recommendations with huge upside and limited downside.

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The Offshore A-Letter specializes is an elite global investment opportunities, asset protection strategies, tax management solutions, second citizenship and residency programs and offshore structures.

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