Japan On the Mend: Going Long

Shortly after the open Thursday, I completed the purchase of a position in the Japanese stock market across all client accounts. The purchase was completed through the exchange traded fund that tracks the major Japanese market index. The ticker symbol is EWJ. Certain clients had owned Japan previously as part of a group of ETFs designed to broadly track global market trends. Those positions are in the buy and hold mode. The most recent purchase is based on the assumption that excellent profits are available over the next six to twelve months….

The Demise of Deflation
Basically, I believe that Japan is exiting a multi-decade period of deflation. The very factors that are worrying U.S. investors appear to be positives for Japan. Inflation for us may very well be reflation for the Japanese. Fundamentals in the Japanese economy are improving with interest rates and real estate pricing rising for the first time in many years. Japanese banks have cleaned up their balance sheets and liquidity now exists throughout the economy for a sustained growth spurt in GDP.

Reform and Growth
I also like the outcome of the recent election which seems to give impetus to a growing reform movement in Japan. It seems like the Japanese government is becoming more responsive to its citizens right as the economy is beginning to accelerate. The September vote will allow Prime Minister Koizumi to implement the reform of the $3 trillion Japan Post. This savings giant will be split into four entities in 2007 in the hope of stimulating competition.
Simultaneous political and economic reform sets up a virtuous circle of improving consumer and business confidence and possibly less government interference in the economy setting the stage gor a long period of improving economic growth. Dare I say, it reminds somewhat of the situation from 1992 to 2000 during the Clinton Administration.

In addition, this week Japan got a further boost from the weakness in oil prices. Japan is a major importer of oil and I think any let up in energy prices removes a potential roadblock to the economic recovery.

Risks
Obviously a global market decline or economic meltdown are ever-present risks. More specific to Japan, however, is the country