3 Stocks for Japan’s Abenomics
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Japan’s Prime Minister Shinzo Abe won a decisive victory on Sunday. His Liberal Democratic Party now controls both houses of Japan’s parliament, giving Abe a mandate to transform Japan.
A big part of that transformation will be centered on Japan’s economy. Abe has steadfastly promised to break the island nation out of its decades-long struggle with deflation.
Since Abe took office, Japanese stocks have been on a tear. But with the recent election outcome strengthening his base of power, Japanese stocks could still move higher from here.
The three arrows
Abe’s plan to revive Japan’s economy is based around “the three arrows.” They are:
- A more aggressive Japanese central bank
- More government spending on infrastructure projects
- Business (labor, regulatory) reform
All three could support Japanese stocks. In fact, investors have already seen how much the Bank of Japan can influence the country’s Nikkei 225 stock index. Year-to-date, the index is up over 40%, largely due to the Bank of Japan’s explicit inflation target.
The other two could be more difficult, but with Abe consolidating power, he has a better shot at pushing them through. The net effect could be to stimulate Japan’s business activity, and make Japanese companies more profitable.
Sony is in the midst of a turnaround
Japanese electronics giant Sony (NYSE: SNE) is in the midst of a turnaround. The company is attempting to update its products and restructure its operations so that it is better able to compete with its South Korean rivals Samsung and LG.
Shares of Sony have outperformed the Nikkei 225 -- they've more than doubled this year!
Much of that is likely due to Abe’s actions. Japan’s currency, the yen, has weakened significantly against the dollar. Last fall, the yen was trading at about 80 per US dollar; today, it’s around 100.
That weaker currency gives Sony the edge -- its electronics appear cheaper to foreign buyers.
There’s also the Dan Loeb effect. The activist investor has been pressuring Sony to do a partial spinoff of its entertainment division. Loeb believes that it's undervalued, and that the unit would perform better if management had a bigger stake in the outcome.
Traditionally, activist Americans have a difficult time getting their way in Japan. But with Loeb fresh off a big Yahoo! win, perhaps he’ll be successful with Sony.
A weaker yen could give Toyota the edge
As with Sony’s electronics exports, a weaker yen could benefit Toyota’s (NYSE: TM) cars. Last week, at CNBC’s Delivering Alpha Conference, hedge fund manager Mark Kingdon praised the Japanese auto stocks, noting that they would benefit strongly from Abenomics.
There’s already some evidence that it may be working. Ford’s CEO Alan Mulally called Japan a currency manipulator last month. Although Ford has benefited from a broad-based recovery in auto sales, Toyota could steal market share from its American rivals with a weaker yen.
In March, a Morgan Stanley analyst told Bloomberg Businessweek that Toyota was benefiting $1,500 per car due to the weaker yen.
But it isn't just the yen. Kingdon thinks workers in the US and Japan are about to get raises, and that should benefit auto sales.
Hitachi is a huge conglomerate
Investors looking for a broader play might be interested in Hitachi (NASDAQOTH: HTHIY.PK). It’s a complex company with nearly a dozen different business segments, including financial and construction.
Its two unprofitable divisions, consumer electronics and automotive systems, should benefit from a cheaper yen. As with Sony, a weaker yen makes Japanese electronics more attractive to foreign buyers. And if a car maker like Toyota is benefiting from a weak yen, it could support Hitachi’s automotive unit.
Moreover, should Abe be successful in getting Japan’s government to spend money on infrastructure projects (the second arrow), it should benefit Hitachi’s infrastructure, construction and power divisions.
Investing in Japanese stocks
Unquestionably, Japan’s been the hottest market of 2013, and it could just be getting started. With Abe consolidating his political power, he should be able to keep working towards improving Japan’s economy.
Sony, Toyota and Hitachi all stand to benefit. A weaker yen supports all three companies’ exports, while infrastructure spending could support Hitachi’s related business segments. Of course, if internal Japanese demand jumps, all three stocks are poised to reward shareholders.
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