One of the better calls I’ve made in my career was to get long Japan back in late November/early December of last year. The trade was based on the premise that then newly elected Prime Minister Shinzo Abe was going to actively devalue the yen to try to break the decade-plus stranglehold deflation had on the Japanese economy.
Large trends like “ending Japanese deflation” take a long time to play out, which is why I didn’t think the “long Japan” trade was over just six months after it started when the WisdomTree Japan Hedged Equity Fund (DXJ) topped out in May. Trends like this go in fits and starts, and consolidations can take months and sometimes quarters. But, if the underlying fundamentals of the trade remain intact, then it’s just a waiting game.
Well, as I pointed out in the chart yesterday, at the risk of tempting fate twice, I think the next phase of the “long Japan” trade is starting, due to two fundamental reasons.
First, it looks at though PM Abe is going to go forward with the national sales tax increase next spring. But, importantly, it is widely expected that he will counteract that sales tax increase by unleashing more stimulus on the economy. In an economy where companies derive much of their revenues through exports, like they do in Japan, the benefit of the stimulus should more than offset any pullback in domestic demand, making this a net positive for most companies (and their share prices).
Second, the awarding of the Summer 2020 Olympics to Tokyo over the weekend will provide more opportunity for fiscal stimulus, as the various stadiums, villages, etc. will need to be constructed. And, while that’s still years away, it adds to the overall bullish narrative and might just have been the anecdotal “spark” to ignite the next stage of the rally.
DXJ remains the way to play Japan, as it hedges you from the declines in the yen—and unlike the last time I got bullish on Japan, I’m going to point out WisdomTree Investments (WETF). WETF is the issuer of DXJ, and their stocks have rallied as the DXJ’s assets under management have grown. If I’m right about DXJ, WETF should rally too.
