The Japanese equity markets have been in a bit of a tailspin lately. However if investors are patient, there is very likely to be a lot more upside in both the Japanese equity market and in the Dollar-Yen currency pair.
I believe that the dollar-yen currency pair may have even greater upside from the 99 level. The reasoning is pretty simple; the Bank of Japan is steadily increasing the size of its balance sheet whereas the Federal Reserve will eventually end its quantitative easing program over the next two years. Based on those fundamentals, the dollar has to appreciate to the yen. If that is the case, than the Yen will devalue which in turn inflate earnings growth for Japanese companies.
Goldman Sachs believes that by 2015, the TOPIX (Tokyo Price Index basically a stock index) will increase in value by 33.8%. Goldman Sachs believes that the dollar-yen will be in a 107 to 110 range. This implies that the dollar-yen could appreciate by an added 7 to 10% from current levels. Because the dollar yen is so volatile, like I have suggested in my previous article, investors should cost-average into a position over a long time horizon rather than trying to time the micro movement of the currency market.
Another play on the Japanese economic recovery is to buy the iShares MSCI Japan Index Fund. This implies that the iShares MSCI Japan Index Fund may have around 25% upside from current levels. The iShares MSCI Japan Index fund has a heavily diversified portfolio with around 312 stocks. The average price to earnings is 21.53 which imply that the fund could outperform the performance of the Tokyo Price Index (high earnings multiples are highly indicative of greater stock appreciation based on higher rates of outwards looking growth).
Or you can look to individual Japanese companies traded in America.
Sony Corporation (ADR) (NYSE:SNE) recently won the fanfare of the media by releasing its Sony PlayStation 4 at a $100 discount relative to its competitors. While, I’m not a fan of this, I believe that the company made the decision with the intention of establishing an early lead in the console space. Microsoft Corporation (NASDAQ:MSFT), on the other hand, is more focused on appealing to its shareholders interests and has opted to keep its Xbox One at a $100 more than the PlayStation 4. I believe that Microsoft’s real upside catalyst is due to its release of Office 365 onto Mac OS X, and IOS. I estimate that business may contribute an additional $10 billion a year in annual earnings for the company.
I believe that Sony Corporation (ADR) (NYSE:SNE)’s real upside potential is in tablets, which I summarize in great detail in a previous article. The company anticipates that smart phone shipments should grow by 27 to 30% in fiscal year 2013. The tablet segment could generate an additional $600 million to $1.2 billion in net income. The fundamental strength in the company’s business is undeniable.