Can Japan End Its Deflationary Spiral? (EWJ, TM, CAJ, HMC, SNE)

japanJeff Uscher: Anyone invested in Japanese stocks took notice when the country’s minister of state for economic and fiscal policy, Akira Amari, said at a Yokohama meeting that he hopes the government takes steps to push shares of the Nikkei 225 up about 17% to 13,000.

“I would like the government to take successive steps to push share prices higher,”Amari said Saturday. “Higher share prices work to improve corporate earnings. It is important for the government to show that it will work hard to aim at having the [Nikkei 225] index hit 13,000 by the end of the fiscal year in March.”

Amari also noted the Nikkei was up more than 2,000 points since former Prime Minister Yoshihiko Noda announced the dissolution of the Diet in November. In fact, the Nikkei 225 Stock Averagelast week closed at its highest since September 2008 after a 12-week advance that was the longest such streak since 1959, according to Nikkei Inc.

Articles in the English-language press misidentified Amari as minister of finance – a position held by former Prime Minister Taro Aso – making the comments seem more like official government policy.

Of course, no one in the government of Prime Minister Shinzo Abe will be upset if Amari turns out to be correct. Higher share prices are good for the economy and for achieving the government’s aim of ending the deflationary spiral in Japan – and good for anyone who owns Japanese stocks.

Can Japan End Its Deflationary Spiral?

On Tuesday, the Cabinet Office announced that Japanese consumer confidence in January had risen for the first time in five months. The index of consumer confidence for households of two or more people hit 43.3, up 4.1 points, the biggest increase recorded since the current survey methodology was introduced in April 2004.

In a statement accompanying the survey, the Cabinet Office wrote, “Share prices are higher on the hope that the weaker yen will improve corporate earnings but we must watch to see if this hope will really result in increased income and consumption.”

In a related story, Prime Minister Abe spoke to Japan’s leading business group, the Keidanren, on Tuesday and urged managers to “aggressively increase wages” as a means of ending the deflationary spiral.

One of the policy measures that will be part of the budget for the year ending March 31, 2014, would give businesses that increase wages by 5% or more a tax credit for 10% of their increased labor costs.

Lawson, a national convenience store chain, has already announced it will increase wages for younger employees by 3%, which was greeted with great fanfare by the prime minister.

Time to Buy Japanese Stocks?

For those investing in Japan, the key element in higher prices for Japanese stocks is the weak yen.

Exporters such as Toyota Motor Corp. (NYSE:TM), Canon Inc. (NYSE:CAJ), Honda Motor Co. Ltd. (NYSE:HMC) and Sony Corp. (NYSE:SNE) earn more money from the goods they export when the yen is weak. These same exporters are a very large part of the price-weighted Nikkei 225 Index, which is why the Nikkei is more volatile than the broader TOPIX index.

The Nikkei 225 is also more volatile than the MSCI Japan Index, which is used as the underlying index for the iShares MSCI Japan Index ETF (NYSEARCA:EWJ).

Before he became a politician, Minister Amari worked for Sony during its heyday in the early 1970s so he is very aware of the impact a weak yen can have on exporters’ earnings. He has also learned about the power of talking the markets in the right direction from Prime Minister Abe, who is a proven master at this technique.

So, does the Japanese government have a target in mind for the Nikkei? Probably not.

Will the government implement policies to push share prices higher? Not likely.

Will Minister Amari and other senior officials throw out comments to push the Nikkei toward 13,000? You can count on it – for a quick trade to the end of March, anyway.

For those looking to buy Japanese stocks to play a Nikkei rally, but who don’t want to pick individual companies, EWJ is the most liquid Japanese equity ETF. Although it is likely to trail any rally in the Nikkei 225 index, EWJ could still rally another 10% if Amari’s 13,000 target is reached. The advantage is that the more diverse composition of EWJ gives investors a bit more downside protection if the trade goes sour.

For those who are willing to buy individual Japanese stocks, TM and HMC are attractive at current levels. SNE could be good for a quick trade on a pullback below $14 while CAJ needs to consolidate around the $35 level for a little while before the rally can resume.

Money MorningWritten By Jeff Uscher For Money Morning

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