Why Japan is now the land of the rising stocks

Tokyo market’s 2013 rally is real, but investors face tough tests

By Rachel Koning Beals

Reuters

CHICAGO (MarketWatch) – Japan, by the numbers, looks like this: 11 finance ministers in seven years; a national debt topping one quadrillion yen, interest rates stuck near zero.

Yet nowadays a different set of figures draws investors — rising stock values. The Nikkei 225 JP:NIK +0.56%   is up almost 30% this year.

A leadership change and the start of unprecedented collaboration between the government and the Bank of Japan have grabbed the investing world’s attention.

This month, the BOJ announced an aggressive plan to buy assets (mainly Japanese government bonds), accounting for about 60% of its GDP. It’s an effort to double Japan’s monetary base and drive inflation up to 2% within two years — vital goals for a country frozen by deflation.

For sure, attention breeds attention. Investors have been flocking to Japan. Many Japan stock funds are up around 15%-20% so far this year, according to investment researcher Morningstar Inc. One of the biggest Japan exchange-traded funds, WisdomTree Japan Hedged Equity Fund DXJ -0.70% , which in addition to buying Japanese stocks also bets against the yen USDJPY +0.38% , has soared more than 24%.

But Japan’s stock surge is giving investors pause as they contemplate their next moves.

“Japan hadn’t been a focus for years. Investors could hardly spell the names [of Japanese stocks now in demand] and now they’re wondering: If I missed the first leg up, is there another leg? And for how long?” says Martin Jansen, head of international equities at ING U.S. Investment Management.

Jansen says the frenzied bulls have it right so far, especially those willing to scrutinize among export stocks and diversify with real estate, banking, and brokerage shares.

Foreign vs. domestic

No economy of this size rises from sleep without wobbling. For Japan, its tests will come with how fast the global economy perks up and how well officials manage to inflate Japan’s economy while keeping its export-dependent sectors competitive.

Big customers like China and the U.S., and the collective emerging markets, will drive revived demand for Japanese cars, construction equipment, electronics, and more. That is, they’ll need to. There’s no ignoring the mid-April headlines showing Chinese growth data had missed the mark and the ensuing tumble — and considerable rebound — for global stocks and commodities. Price competitiveness can’t be the only feature of an export-led recovery where thin margins have been a hallmark of Japan’s “lost” decades. Volume and market share need to improve too.

Outside of exports, there’s a lot riding on revived interest in Japan’s real estate, stock market, and the banks and brokerages driving those businesses.

“We’re just at the beginning of a trend in which public and private pensions and the major institutions are running strategic allocation reviews now favoring equities,” Jansen says.

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