Lessons For Stock Investment From Japan

Economists call the 1990s Japan's "lost decade," but the Japanese market losses are far from over. . .

Japan's second largest bank, Mizuho Financial Group, just announced it will reduce its stock market holdings by over 900 billion yen, or $9.2 billion.

Bloomberg says Mizuho's pullback will likely affect over 1000 companies, most of them domestic. 

That won't help the Tokyo Stock Exchange and its benchmark index, the Nikkei 225. The Nikkei topped out again recently, failing to even touch November 6 resistance at the 9,500 mark.

As we see in the chart below, Bollinger Bands tell us that the Nikkei is edging towards overbought status. That's despite the index having lost half of its value in the past year. Bargain-hunting only takes you so far.


For Mizuho, a highly-leveraged bank cut from the same cloth as Citi and several other adventurous American finance houses, the time has come to raise money through share sales.

That may help the bank's balance sheet, but it could be disastrous for Japanese investors and those who are long the EWJ iShares MSCI Japan ETF (NYSE:EWJ).

Alas, the hits will keep coming. . .

Tokyo Leaders Fall Asleep at the Switch. . . Again

Japan's revolving-door government hasn't done the economy any favors.

Japan has had four prime ministers in three years. In February, Finance Minister Shoichi Nakagawa became a YouTube sensation for his appearance at the G7 meeting of leading industrialized nations. In perhaps the most appropriate personification of global political response to the current economic crisis, Nakagawa-san slurred his words and fell asleep at the microphone.

Whether he was drunk, tired, heavily medicated, or trying to hibernate through another financial cataclysm for his country, we can't be sure. . .

Nakagawa resigned, and within a few weeks, his successor Kaoru Yasano announced a Q4 2008 GDP drop of 12.7% from the same period in 2007, calling it "the worst economic crisis in the post-war era." Maybe the market would have preferred Rip Van Winkle's yawning analysis.

Despite the staggering double-digit quarterly decline, Japan's economy is still the world's second largest.

This downturn will be different from other post-war slumps, though, because China is closing in. Financed by cheap exports and able to amass over a trillion dollars in foreign exchange reserves, Japan's historical rival in the Middle Kingdom has successfully shifted itself into the Far East's driver's seat.

Of course, China's Communist government couldn't become an economic giant all by itself; Japan has handed China huge oppportunities to take the lead.

Japan's government in the 90s created a number of "zombie banks" that swept bad assets under the rug and brought new government funds into a closed cycle. The Bank of Japan belatedly lowered interest rates to ground level (currently 0.1%), turning the yen into the most important implement in the forex strategist's toolbox. . .

Foreign currency mavens have moved the yen to a central role in a worldwide "carry trade," where traders borrow in yen and move into higher yielding currencies.

When panic hits, those traders move back into the yen for lower yields and less risk. The Japanese currency therefore gets stronger, hurting exports by making Japanese goods pricier on the global market. So what are Japan's options?

Much of the jargon we hear from CNBC chatterboxes now is taken directly from the glossary of Japan's boom-bust disaster and protracted recession. For us, it's like having a guidebook that tells you only which roads lead to dead ends and which berries will poison you, but we still don't see any real beaten path to success.

Japan is having an even tougher time putting those hard-learned lessons into action.

Economic Growth Is Being Spirited Away

Looking forward, Japanese newspaper The Daily Yomiuri is reporting this week that the disoriented government plans to create 2 million jobs over the next 3 fiscal years...

Prime Minister Taro Aso wants to emphasize carbon emission reduction, better care for the elderly (over 22% of Japanese citizens are over age 65) and, above all, use Japan's strengths to restore economic growth.

Japan is about to get its third stimulus in six months toward those goals, but Japan's traditional strengths like technological know-how and productivity simply do not translate as well as they used to.

When it comes to 21st-century advantages, the government includes anime (Japanese animation, which is popular around the world) and the fashion industry in a new "creative export" category where it hopes for tenfold growth.

It may just turn out that the cartoon realm is Japan's best bet for growth in coming years because the real world outlook isn't at all bright.