Signup for our free newsletter:

Investing in Japan's Abenomics

Written By Brian Hicks

Posted December 30, 2013

The land of the rising sun is shining again after decades of economic weakness. When Shinzo Abe became prime minister last year, the economy strengthened incredibly. He’s slowed Japan’s decline with many of his decisions, but two of them will contribute to a real turnaround.Shinzo Abe%2C Japanese Prime Minister%2C Abenomics%2C Investing in Japan

  1. Hosting the 2020 Olympic Games
  2. Abenomics

The Olympics will bring in money internationally and Abenomics will bring money in domestically by printing more of it. Actually, Japan has been able to double its inflation target to a whopping 2 percent, which will help avoid deflation.

If you’re skeptical about the printing of money, you have a right to be, but in Japan’s case, it’s helpful. With the yen depreciated, exporting companies like Toyota make a lot more money.

Economic growth has been seen in the Nikkei 225, the main index for Japan. In the early part of December, it closed at 15,403 yen. This is a 47 percent climb since January 2012 and a 70 percent rise since November 2012. At the time of this writing, it’s risen to 16,291 yen.

While it’s still a long way from tying its record high of 38,900, set in 1989, it’s still rising. This is a great sign that the economy truly is on the path of recovery.

Does that mean you should jump in before it gets too high?

Many investors are bullish with Japanese equities. A Reuters poll reported by the UK publication City Wire shows that analysts expect gains of 16 percent on the Nikkei index in 2014.

The only problem is that the country currently has one of the lowest sales tax rates, at just five percent.

That is going to change significantly in April 2014, when the government hikes the tax rate to 8 percent.

As you can guess, this is going to affect residents financially. With higher tax rates, purchases will cost more, and if incomes don’t increase, there will be economic slowdown.

This has led some to wonder what the prime minister’s goal really is. Could all of the changes and preliminary economic success be to set up big companies to benefit the most?

It’s possible, but as an investor, you don’t have to worry too much about the tax rate hike coming down the pipeline. You just need to keep it in mind as you decide which investments to make that will benefit more from the change.

Japanese Stocks

Japanese stocks are among the most popular for international investors. Bloomberg reports investors have poured as much as $125 billion into Japanese stocks in 2013, and that is expected to continue well into 2014.

Some of the most noteworthy stocks are big companies such as Hitachi (OTC:HTHIY), Toyota (NYSE: TM), and Mitsubishi UFJ Financial Group (NYSE: MTU).

Stick with equipment and export investments because they will see the biggest gains in the new year due to the tax change.

Global Economic Effects

There’s something else you need to keep in mind. The U.S. recently announced they will start to taper it stimulus in January. This will likely increase the value of the dollar and depreciate the yen. This could end up benefiting exports even more, but you should wait to see the effect of the taper.

The economic downturn of the U.S. may or may not have a positive effect on the global economy, and it’s important to know which one it is before you invest.

What to Avoid

Stay away from real estate in Japan.

Stay away from anything that has to do with it.

The tax hike will keep people in their current homes, and the likely rise in house prices will just reinforce that behavior.

For now, focus on the big companies that will benefit from Abenomics, and keep an eye on what happens with the tax hike. As the government plays it out, more opportunities are certain to rise in the near future.