Double Whammy for Japan Stocks

 | Apr 01, 2013 | 5:30 PM EDT  | Comments
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Is bad news good news for Japanese stocks -- again?

Clearly not today, of course. The Nikkei 225 index fell 2.12% overnight with 206 of the 225 stocks in the index declining.

In the very short term, Japanese stocks took a drubbing from bad economic reports from Japan, China and Korea. For example, the Bank of Japan's Tankan index showed that Japanese companies intend to reduce capital spending for the fiscal year that started today. Disappointing growth in those economies led to a double whammy for Japanese stocks.

Whammy one: Slower growth raised worries about earnings growth for the quarter that just ended on March 31. (That's also the end of the fiscal year for Japanese companies.) With Japanese stocks having rallied so strongly on a belief that a weak yen would push up revenue and earnings for Japanese exporters, worries about growth resulted in some big drops. In Tokyo trading stocks that had done best in the rally took the worst drubbing. Shares of Mazda Motor fell 4.3%; Mitsubishi UFJ Financial Group (MTU) was down 4.66%, Toray Industries dropped 4.4%, and Sumitomo Mitsui Financial Group (SMFG) declined by almost 6%. The trend continued in New York for U.S.-traded ADRs, with Mitsubishi UFJ Financial Group down 6.4% and Toyota Motor (TM) dropping 1.5% as of 1:30 p.m. EDT.

Whammy two: The bad news on growth in Asia and continued uncertainty in the eurozone, where every bank depositor with enough cash to hire a lawyer has challenged the recent deal to use funds from large depositors to support a bailout of Cypriot banks, has led to a flight to safety that has pushed up the price of the yen. As of noon in New York, the yen was up 1% against the U.S. dollar and 0.7% against the euro. A stronger yen won't give revenue and earnings of Japanese exporters the bump that investors (and this rally) had been expecting.

So where's the good news in all this? The Bank of Japan meets on April 3 and April 4 for the first time under its new governor Haruhiko Kuroda. Last week I heard some doubters questioning whether Kuroda would be as aggressive in weakening the yen through a package of unlimited asset buying as the market was expecting. With today's lower-than-expected Tankan confidence numbers and the decline in Japanese stocks, I think the worry is now off the table. Whatever the Bank of Japan's moves to date to weaken the yen and to raise inflation expectations have been, they haven't been remotely enough. If Kuroda wants to put Japan on a new course -- and I believe he does -- he's going to have to be more aggressive rather than less.

For the last year, the smart move in any global stock market has been to bet with the central bank. I don't see any reason to change that strategy now. Today's big decline is a good opportunity to increase your exposure to the inflationary weaker yen policies of the Bank of Japan. New York traded ADRs of the big Japanese banks such as Mitsubishi UFJ Financial Group and of big Japanese exporters such as Toyota Motor are a good way to bet with the Bank of Japan. If you can trade in Tokyo, I'd suggest an industrial exporter such as carbon fiber maker Toray Industries (3402.JP), a financial stock such as Sumitomo Mitsui Financial Group (8316.JP) or office machine exporter Ricoh (7752.JP.).

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