Does your stock portfolio have enough exposure to Japan?

When’s the last time you heard that question? Your answer is probably measured in decades.

The Japanese stock market, as tracked by the Nikkei 225 index, hit an all-time high—intraday—on December 29, 1989 at 38,957.44 yen. The subsequent low after the bursting of the Japanese asset bubble came on March 10, 2009 at 7054.98 yen. The percentage drop is stunning—82%–but the duration is mindboggling. This bear market went on and on and on for 20 years.

But something unusual—very unusual—happened to Japanese stocks at the end of 2011. In the after-math of the March earthquake and tsunami, the Nikkei retreated to 8605 yen, the lowest level since 2009. Worries about the effects of the destruction on the Japanese economy and fallout from the Euro debt crisis pressured the index lower to a bottom on November 25, 2011 at 8160.

And then the index began to move UP. On March 27, 2012, the Nikkei 225 broke 10,000 yen—climbing to 10,255.15. That’s still 74% below the 1989 high. But it’s the direction that counts.

You’re certainly entitled to ask how long the trend will point up. After all Japan is a country with huge and widely recognized long-term problems of a massive budget deficit and an aging population. I don’t want to pretend that those problems have been fixed or that they don’t count in the long run. But in the short-term—a year or two—I think there’s sound reason to think that the upward trend is sustainable.

Let’s count the whys, okay? Read more

The downgrade from Moody’s isn’t nearly as big a problem for Japan as the soaring yen

A downgrade might actually help if it took the yen down a bit.

That’s not likely, though, as long as financial markets remain fixated on the risk of a global economic slowdown.

Yesterday, August 24, Moody’s Investors Service downgraded Japan’s government debt one notch to Aa3. Moody’s called that rating stable, meaning it thinks it unlikely that it will revisit the rating within the next 18 months. The move is Moody’s first downgrade of Japan’s debt since 2002.

Yesterday’s downgrade brings Moody’s credit rating to the same Aa3 rating as the company gives China. Standard & Poor’s lowered Japan’s credit rating to AA-, equivalent to Moody’s current rating, in January and has Japan under review for another downgrade. Fitch Ratings puts Japan at AA- with a negative outlook.

Nothing much as stopped the rise of the yen, though, and the Moody’s downgrade isn’t like to change that. The government last intervened in the currency market on August 4 by selling yen to try to stem its appreciation. But the yen, undaunted by the intervention, hit a postwar high of 75.95 to the dollar on August 19. It closed at 76.55 today in Tokyo.

Japan has the world’s second largest (after China) foreign-exchange reserves at $1.07 trillion, but the government doesn’t look like it’s about to rush to intervene in the currency markets again even though a higher yen is killing Japanese exporters and depressing a national economy that has contracted in each of the last three quarters.

Yesterday, for example, instead of intervening, the government announced that it would release $100 billion from foreign currency reserves to the state-run Japan Bank for International Cooperation for funding to aid exporters and spur purchases overseas. The one- year program is intended to encourage “the private sector to exchange yen-denominated funds to foreign currencies by supporting exports by small and mid-sized companies, securing energy resources and helping Japanese companies to purchase foreign businesses,” Finance Minister Yoshihiko Noda.

The government had to be seen to be doing something—Japanese exporters had built their financial plans for 2011 on exchange rates of 80 yen to the dollar or better—but even $100 billion in trade financing won’t be much of a boost to Japan’s economy.

All this comes as Japan gets set to welcome a new prime minister next week. Current Prime Minister Naoto Kan has said he will step down on August 26.

Japan’s government debt is projected to reach 219% of GDP in 2012 (without including borrowing for earthquake and tsunami recovery efforts.) But Japan continues to have some of the world’s lowest interest rate as domestic investors continue to buy government debt. Japan relies on overseas investors to buy less than 10% of its government debt. That’s likely to change over the next decade: The International Monetary Fund projects that outstanding government debt will exceed total financial assets owned by households in five to 10 years. That would increase the need for overseas cash to fund government debt.

Today’s rally in Japan on news that could have been worse suggests stocks may have fallen too far

Here’s the question that global stock markets are grappling with now: If global economies are slowing, stocks should get marked down in price. But by how much?

This morning’s economic data from Japan and the reaction of the Tokyo stock market suggests that the August sell-off may have gone a bit too far.

The news certainly wasn’t good from Japan. Gross domestic product fell at a 1.3% annualized rate in the second quarter.  That’s the third consecutive quarterly decline: Japan is most definitely back in recession.

But GDP fell more slowly than the 2.5% drop projected by economists as spending on reconstruction efforts after the March earthquake and tsunami started to offset some of the damage from the event itself and a slowing in exports caused by a stronger Japanese yen.

On the news the Nikkei 225 stock index was up 1.4% as of the August 15 close in Tokyo. Read more

Some of Japan’s best companies are now selling at bargain prices

An aftershock measuring 7.4 hit already devastated northeast Japan today.

It’s likely though that a decision by the Bank of Japan not to significantly expand its own program of quantitative easing weighed more heavily on stocks. The Nikkei 225, which had been up as much as 1.1% during today’s session, closed up less than 0.1% for today, April 7. The index is now down 8% from its pre-earthquake and pre-tsunami close on March 10.

Investors were hoping that the Bank of Japan would add to its monetary stimulus program to help speed the country’s recovery from the earthquake/tsunami disaster. But other than announcing a new $12 billion program of one-year loans, the central bank has decided to maintain the status quo. The bank will not increase the size of its $120 billion asset-buying fund or of a $360 billion credit program. The bank also announced today that it would hold its benchmark interest rate steady. But with the rate already set at 0% to 0.1% nobody was expecting any action on this front.

I know the road back from this disaster is likely to be long and difficult but shares of some of Japan’s world-class exporting companies are selling at bargain prices even against that backdrop. Read more

An earthquake and tsunami devastate Japan and the country hangs on the edge of a nuclear disaster, and the yen soars to a post-World War II high of 76.25 against the dollar.

An earthquake and tsunami devastate Japan and the country hangs on the edge of a nuclear disaster, and the cost of insuring against a default on Japan’s government debt in the credit-default swaps market rises to an all time high.

Seems perverse, no? The sell off in the stock market on fears that one or more Japanese reactors was headed to a meltdown and then the reversal just days later when stocks rallied on hopes that the meltdown could be averted seems completely understandable in comparison. Sell-off to rally is just the normal stock market yo-yoing when nobody has enough information for a rational decision.

But this other stuff—strongest yen since WWII and simultaneously the greatest danger ever that Japan’s government would default—that’s just nuts, right?

No, perverse it may be but it’s perversely logical. And if you can get your mind wrapped around why it makes sense for the yen to rally while Japan’s governmental debt gets dissed, then you might have a chance of figuring out whether Japan’s need to go hundreds of billions of dollar further into debt in order to finance a post-tsunami reconstruction is going to be good or bad for the bonds of the deeply indebted United States.

Okay, seat belts tight? Let’s go for a bumpy ride in the global financial markets. Read more