Investing in Japan: Three Choices One Year after the Disaster

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Like it has been for other Japanese families, this past year has been a tough one in my household, too.

Perhaps not surprisingly, Sunday's one-year anniversary brought long-buried emotions to the surface 12 months to the day after the horrific earthquake and the tsunami it spawned devastated Japan.

The tragedy haunts it still. I don't know a single Japanese who isn't affected.

And I still struggle to process the enormity of what's happened in a country where I've spent much of the last twenty years as a businessman, a husband, and a father.

How do you explain a 9.0 earthquake or a 65-foot high wall of water moving at 80 miles an hour?

Or come to terms with the friends and families who were literally wiped from existence

I couldn't explain that to my youngest son, Kazuhiko, when we visited Kamigamo Jinja, our ancestral family shrine to pray shortly after the disaster.

He wanted to know how the spirits of those departed would find their way home each August for Obon, a more than 500-year-old annual celebration when ancestral spirits make their way back to family altars.

My wife, Noriko and our boys, Kunihiko and Kazuhiko, return home to Kyoto this Friday so we'll see if they've made peace in their young lives as so many other children have.

It is through their young eyes that the future does indeed live, as is the case in so many cultures.

The Aftermath of the Japan Disaster

To that end, I'm sure you've seen the many before and after pictures of Japan making the rounds in recent days.

They're staggering and impressive.

But at what cost?

So far Japan has scraped millions of tons of debris from disaster-hit areas into monstrous piles. Only 6% has been burned or otherwise disposed of. You don't hear about that from U.S. news sources.

Nor do you hear about the additional 130 million to 150 million cubic meters of soil that have yet to be scraped, processed or otherwise remediated to eliminate everything from toxic chemicals to radioactive contamination.

That's enough to fill the Empire State Building floor-to-ceiling 143 times.

In the aftermath, only two of Japan's 54 nuclear reactors are online and running. The rest are down for "inspections" and disaster preparedness drills.

There is a good probability that many may never be restarted, especially with anti-nuclear protests building not only in Japan but around the world as a result of this mess. Most are decades old and of questionable design given what we know about nuclear power safety today.

While I used to be a staunch advocate of nuclear power, today I am now firmly against it.

Cleaning up Fukushima is especially problematic on a couple of levels and estimates suggest it may be 40-50 years before the plant is completely decommissioned.

Not only does the Japanese government have to figure out how to contain the mess, but things are so badly mangled on the ground that the Tokyo Electric Power Company (TEPCO) isn't even sure it can locate the melted nuclear fuel rods at the moment!

An estimated 100,000-275,000 people remain in temporary or modified housing according to various sources. The Japanese government is telling people that it may be a decade or more before they can return home — if ever.

To its credit, the government has gone to great lengths to keep neighbors and families together as a means of preserving the cultural groupism that has played such a vital role in Japan's society for more than 1,000 years.

Separating people would have broken that bond and weakened recovery efforts.

So what now?…

Investing in Japan

Many investors believe that investing in Japan's recovery is a sure shot to riches.

That's not true today any more than it was true immediately after the disaster, a point I made in repeated television interviews at the time and in Money Morning.

Its population is literally dying off as the nation struggles to bear the burden of one of the world's oldest populations. The birth rate is 0%; there is no immigration policy to speak of. Debt is at 259% of GDP, which makes the Greeks look positively organized and miserly. And the economy is basically flat.

Despite optimistic thinking, Japan's economic machine is unlikely to ever regain the prominence nor the speed or momentum it enjoyed from 1945 to 1991.

But certain Japanese-related investments and Japanese companies will prosper as a function of the role Japan plays in the world around it.

Here are three choices worth considering:

Currency – Japan's yen remains wildly overvalued despite the fact that it's already corrected substantially from its low of 75.7698 to the dollar on October 28, 2011.

But this won't last much longer.

As riskier assets come into vogue, the yen will decline as traders shuffle their bets into other assets instead of parking their money in yen.

At the same time, it's highly likely Japan will have to turn to external debt financing no later than 2015 as a means of compensating for an aging population and fewer workers to support the 90%+ of debt purchased by its own citizens.

Consider the ProShares UltraShort Yen (NYSE: YCS). It's an inverse ETF designed to appreciate as the yen falls. It's already moved up 17.06% off its 52-week lows and could really be a great trade if you've got the perspective necessary to stick with it.

Machinery – Japan's machinery industry remains largely overlooked at this stage. Still, economists see an increase of about 2% this year, which is widely interpreted as a leading indicator for additional capital investment. The most recent data from Tokyo shows a 3.5% increase to 757.8 billion yen in January, the most recent month for which there is reporting.

Electrical machinery makers are leading the charge with a 31.1% expansion. The carmakers everybody thinks are so crucial turned in only 12.4% growth.

I suggest looking carefully at both Tokyo Electron (Tokyo: 8035 or TOELY.PK) and Fanuc LTD. (Tokyo: 69540 or FANUY.PK).

Both are showing signs of strength as global manufacturing activity accelerates. While three of Tokyo Electron's plants suffered a near-direct hit in the earthquake and tsunami, its Miyagi-based facilities were built on hills and did not suffer material damage. Fanuc was largely unaffected. This gives both companies a potential head start on competitors who were knocked back a few paces.

If you're thinking about picking up one of the many ETFs that offer a basket of Japanese stocks as a means of accomplishing the same thing, here's something to think about.

A falling yen is going to drag on Japan's stock market and if you're buying the broader indices as opposed to specific stocks, you're going to get a lot of trash with the trinkets.

I believe it's better to concentrate on specific companies, especially if I know the broader markets are not likely to go along for the ride.

Why?

They're the ones most like Japan's cherry blossoms – full of hope, bright color and spirit. And, in that sense, are a tremendous metaphor for life itself.

[Editor's Note: In today's report, Keith Fitz-Gerald notes that the ProShares UltraShort Yen ETF (NYSE: YCS) has surged about 17.1% off of its 52-week lows.

Thanks to Fitz-Gerald, Private Briefing readers had the chance to pocket almost every bit of that surge.

Back on Feb. 3, he told the subscribers of our premium edition of Money Morning that the yen was poised for a fall - and that the YCS ETF was the way to play this trend. He was right on the money - it's risen 16.3% in the five weeks since ... an annualized return of more than 150%.

In the last six months, Private Briefing has recommended 39 winners, including 23 double-digit gainers. Best of all, the daily briefing gives you access to $28,000 worth of investing research and access to our top experts ... for just $5 a month. To find out more about Private Briefing, just click here].

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Tom Pendergast | March 14, 2012

    I'd like to offer you and your family heartfelt condolences for the painful losses you have suffered over the past year. As a 25-year resident of Japan, I readily empathize with your family.

  2. DaveR | March 14, 2012

    I, too, offer you and your family my deepest condolences.

    Regarding nuclear power, why not replace existing old facilities with new facilities on the same sites or nearby — further inland? Those sites are already polluted or contaminated with nuclear and perhaps other waste materials. The earthquake itself did not cause any nuclear leakage. The post-incident reports I have seen and read indicate the real cause of the nuclear disaster was the tsunami which caused failure of the backup cooling water system pumps and generators. If this electrically operated pump system had had a reliable backup system or there were sufficient portable electrical generators and pumps stored further inland, the post-tsunami disaster including the explosions, fires and melt downs could have been averted.

  3. Lary | March 14, 2012

    Keith, I have to tell you that Pro Shares Ultra Short is a four letter word in my house. I bought that stock a year and 1/2 ago and keep it for 1 year and watched the yen go up for no good reason and the price of my stock fell steadily. I hung on thinking that surely people will figure out that the Yen was a disaster waiting to happen. But like all things financial the old paradyme that would have taken Pro Shares to the moon have no meaning in todays mixed up and confused world. On every thought you might have based on some sort of logic, you have reverse your thinking if you are to be ssuccessful in making that bet. I lost $2,000 on Pro Shares by keeping it 1year. Thats how logical thinking can cost you money.

  4. Capt W.J.Mildfelt,USNRet | March 14, 2012

    Keith, I empathize with you and your family and the and the Japanese people! Having served and travelled much of Japan from Hokkaido down through most of Honshu, I can relate heartfullu with all things Japanese They have proven them themselves very brave and resolute through this terrible tradgedy and I am most hopefully praying for their recovery. We can only liken their experience to our 911.Warmest Regards W.J.

  5. Linda Eismann | March 15, 2012

    My condolences to you and your family and all those who have lost so many and so much. To comfort your children, those who have died are no longer limited by time, space, gravity, nor any other of the forces that limit us. They now live in a state of being we cannot imagine, and love is there. Love never dies. If the ancestors need to express love at a certain place and time, they will be there.

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