The best way to play the Bank of Japan’s aggressive stimulus efforts is to buy Toyota stock.
The Bank of Japan is pumping trillions of yen (hundreds of billions of dollars) into the Japanese financial system to counter deflation.
The efforts are sparking Japanese stock market euphoria. The Nikkei 225, a broad index of Japanese blue chips is up 11.1% this year.
But a recent pullback in the Nikkei showed that when the Japan QE game is up and markets get wind of the real troubles plaguing the Japanese economy, market optimism will subside.
Two weeks ago, on April 23, the Nikkei eclipsed the 20,000 mark for the first time in 15 years. It was up on the year as much as 15.3% at 20,116.19. But then reality set in for the roaring Japanese markets…
You see, for all these efforts to try and stave off deflation, Japan simply doesn’t have enough domestic spending to grow the economy – stimulus or not. The most recent data from the Japanese Ministry of Internal Affairs and Communications shows that overall household spending has fallen every month since March 2014 when it jumped 7.2%.
But most, if not all, of that increase in household spending was buoyed by Japanese consumers buying as much as they could before an April sales tax went into effect. It declined 4.6% the month after and another 8% after that.
That’s why the fundamentals don’t support a rally in the Nikkei. Since topping out on April 23, the market index has fallen about 4%.
And while you’re right to be wary of the Japanese stock market, the BOJ easy-money policy is providing a different kind of opportunity for Toyota Motor Corp. (NYSE: TM) stock.
Here’s why…
Why Toyota Stock Is a Buy Now
Since October 2014, there have been some successes to the accelerated BOJ QE efforts.
The yen has fallen almost 10% against the U.S. dollar since the BOJ doubled down on its stimulus. That’s been helping exports, but it also reveals a harsh reality about the Japanese economy that’s embedded in its history and continues to this day.
“Japan made a conscious decision after World War II to become an export-based economy and the cost of doing that means they unfortunately have no domestic consumption,” Money Morning Chief Investment Strategist Keith Fitz-Gerald said. “The Japanese consumer is all but dead. The Japanese government has got to recycle its debt, and the only way that Japanese corporations – which are the export backbone of that country – profit, is to weaken the yen to the point that Japanese goods are competitive.”
That’s where Toyota stock comes in.
“Toyota is king of the exports,” Fitz-Gerald said. “They have one of the largest R&D budgets on the planet, fabulous engineering, a world-recognized brand and they’re an absolute powerhouse in the automotive world.”
That all showed in Toyota earnings this quarter.
Toyota’s total sales were up for the year ending March 31 from 25.6 trillion yen ($214.6 billion) in 2014 to 27.2 trillion yen ($227.5 billion) this year. What was most exciting, however, was its growth overseas.
Sales in Japan were up a slight 0.7% – largely because of the languishing domestic consumption. But in North America they were up 19.2%.
And what’s even more intriguing about Toyota stock is that this leading automaker in Japan is attempting to revolutionize the industry, much like it did with the Prius, by rolling out a new hydrogen-powered car, the Mirai.
Toyota has begun placing orders for the $58,000 hydrogen auto at eight Toyota dealerships in California, USA Today reported Wednesday. Those will be sold through those vendors in October. Toyota expects to sell 3,000 units by the end of 2017.
But these limited sales are a first step in what could very well be a shakeup in the automotive industry.
"This, I think, is going to change the game just like Tesla did but it's going to go farther," Fitz-Gerald said. "I like Toyota here. It's new technology and it's going to be good for investors."
Toyota stock is up 13% in 2015. It jumped 3% today after reporting earnings May 7. Toyota stock now trades around $142 per share.
Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.
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