When one expects deflation,people fail to spend-why buy something today when one can buy the same thing at half the price one month from now.So spending is deferred which is very bad news for consumer oriented industries.What is happening now is a seismic shift-prices are rising in Japan after close to a decade.While this would be disastrous for poor countries,Japan is incredibly rich.It has a trillion dollars tucked away in cash and bonds both of which will lose value with rising inflation.So what would be the course of action for the Japanese -spend the cash to buy stuff today as it will be costlier tommorow+shift the money to equities which would be further increased when the increased consumer spending translates into better earnings.Of course the higher input costs would weigh on earnings but the moot point here is that the Japanese consumer can afford to buy stuff(unlike their Americans or British counterparts).What is needed is a shift in thinking patterns.Of course in the long run they would end up just like the US now,spending money they don't have on stuff they don't need.But that is years away from now when one should sell commodities,Japan(everything in my current portfolio) and buy the S&P 500 and the dollar(everything I am short right now-of course GM and FNM will cease to exist,I mean the survivors).
Why buy the JSC and not the EWJ?
Marc Faber advised to buy small caps because they are mostly dependent on the local Japanese economy.Increased spending by the Japanese consumer is what is likely to drive growth.The Japanese exporters which have a high weightage in the major indices would be battered by multiple factors-the rising Yen,reduced global growth and rising input cost.This is not to say that the Japanese won't buy Toyota cars.They will but the current stock prices are built on too optimisitic earnings forecast which would be revised downwards going forwards.Or in other words EWJ is more riskier than JSC given problems facing global growth.
Why buy the index?
Index investing has beaten stock picking hands down unless of course one is named Warren Buffett or Peter Lynch.But then one has to know what index one has to be in.I hope I am in the right one with this.Besides it would be difficult to find any US listed small cap ADR.
Disclaimer:Any gain anyone makes from this,feel free to give me credit.Any loss is completely your fault.
$41.11 (07/03/08)
