Our mission here at International Living Investor is to hunt down the best profit opportunities the world has to offer.
But it also means looking in places mainstream investors have passed over. Places that are unloved and unwanted…and are therefore selling at low valuations.
One such place is Japan.
Now, I know what you’re probably thinking: Didn’t Japan crash and burn 20 years ago? Hasn’t it been in a slump ever since?
The answer, of course, is yes.
And that’s what makes Japan such a great place to invest right now.
The Nikkei 225 has lost 73% of its value since it peaked in 1989. That’s worse than just about any market you can think of over the last 20 years.
And it’s what makes Japan such a perfect investment destination over the next decade and beyond—it’s a great contrarian play.
The investment case is simple.
Since Japanese stocks entered their post-crash slump, Japanese investors have switched into holding Japanese government bonds. This has kept the price of bonds high and the price of stocks low.
But that’s about to change. Japan has built up a serious debt problem since its economy crashed in the early 1990s. And now it looks as though the Bank of Japan will be forced to start printing money to keep its bond market afloat.
Public debt is about twice the size of Japan’s total annual economic output (GDP). This makes it the second most indebted nation on Earth after basket case Zimbabwe.
At these levels, Japan has reached what economists call a point of permanent structural deficit. Debt keeps growing…but the tax take doesn’t…so rising interest payments become impossible to service.
As of last year Japan had 40 trillion yen in tax receipts—the same level in nominal terms (not adjusted for inflation) as in 1985. But expenses have increased 200% to 97 trillion yen since then.
Japan is unlike the U.S. in that its own citizens fund the bulk of its national debt. But this is a ticking bomb. Because the Japanese population is shrinking. And without more people entering the system, there’ll be nobody left to buy Japanese government bonds.
So what does this all mean?
It means that Japan’s central bank will have to crank up the presses to prop up the country’s debt market. And that Japanese government bonds are going to be a terrible place to be over the coming years.
This will do two things:
- It will cause the Japanese yen to weaken, helping boost earnings for the nation’s exporters.
- And it will force Japanese investors out of bonds and into stocks.
The Nikkei 225 has gained 4.5% already this year. And according to Goldman Sachs, Japanese stocks could rise by 20% by end of June.
The easiest way to play this is through the iShares MSCI Japan Index ETF (NYSE:EWJ).
This ETF tracks the performance of the MSCI Japan Index and includes top Japanese exporters Toyota Motor Corporation, Honda Motor Corporation, Canon Inc. and Sony Corporation in its top holdings.
As emerging Asia booms—particularly China—these exporters should see profits rise. Japan has been in a 20-year bear market. But it’s a steal now at current prices.