Japan Breaks Out - Forget the Crash

By Dr. Duru written for One-Twenty

April 8, 2006


I am declaring another victory over despair and market chop and churn. Over the past week, the Japanese stock market, as represented by EWJ, broke out to new 52-week highs. This index is now less than 15% away from reaching the highs last seen in 2000. Why am I declaring "victory"? Well, I have been following the drama in the Japanese stock market more closely ever since the despair over the LiveDoor scandal took the Japanese stock market down hard. I scoffed at the despair and asked that you at least not sell the Japanese market. After no crash came, the stock marketproceeded to bounce up and down for two months. Each return to the bottom of the trading range gave investors enough concern and excuse to sell. Now, this week, we are in breakout territory for the stocks, and the resurgence of the Japanese economy continues. I strongly expect this breakout to hold and to lead to ever higher prices. The chart below tells the stoy in pictures:

EWJ

You might wonder why I have been so bullish on Japan in the first place? Well, I will admit I am a bit late to this story. But over a year ago, I read "Unsustainable: How Economic Dogma is Destroying American Prosperity" by Eamonn Fingleton.

The book was a compelling read. It argues that the U.S. is headed for economic hard times if it continues to lose its ability to do advanced manufacturing. While it was a bit heavy on its cynicism regarding the Internet and its economic potential (for example, Fingleton thinks that Internet searches are near useless), the book helped me understand just how powerful Japan remains. I realized that Japan has not become an economic backwater. Far from it. They are almost the same powerhouse that they were back in the 80s and early 90s - back when we feared Japan would literally buy up the entire United States. Sure their stock market crashed. Sure real estate blew up. But the people of Japan are the same, and they did not lose their ability to produce. Far from it. Japan remains a tiger, albeit a tiger laying low...waiting for its time to emerge triumphant again. One need look no further to the pounding Toyota and Honda continue to dish out to General Motors and Ford. It seems that Toyota will soon become the #1 automaker in the world - snatching the mantle long held by General Motors. When that happens, I think the general press and masses will finally wake up to what is really going on. By then, the Japanese stock market will really look expensive. Thus, I continue to believe that any dips in the Nikkei are dips worth buying. And I imagine that with the Bank of Japan contemplating FINALLY raising interest rates, and not to mention the massive debts the government has accumulated trying to fight deflation, that there will be plenty of moments of despair that will bring the Japanese stock market back down for a temporary sale.

As always, time will tell. And as always, I encourage you to be careful out there!

DrDuru, 2006