Tags: Japan | yen | fall | exporters

Japanese Stocks Are About to Rally

By Sean Hyman   |   Monday, 22 Oct 2012 07:42 AM

Japanese stocks are about to rally. How do I know? Japan’s Nikkei stock index and the Japanese yen have a very high inverse correlation to them. Why?

Many of these companies are exporters. They export their goods from Japan to the United States, Europe, etc. So a “cheap yen” makes foreigners feel that their money goes far in buying Japanese goods. But an expensive yen makes foreigners’ money go a lot less far in purchasing Japan’s goods.

What are some of Japan’s most well-known exporters? They’re companies like Toyota (TM) and Honda (HMC).

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How do I know these stocks are about to rally? Because the yen is already beginning to fall.

You see, for the last couple of years, the yen has rallied and remained very strong. It peaked in October 2011, but remained high for many more months.

In late January 2012, the yen was unable to surpass its old highs. In fact, it fell short of its old highs, which made the first “lower high” in the yen.

Then in September 2012, the yen made its second “lower high.” Since we’ve seen two “lower highs” in a row, that means the yen has seen its top for now and is in decline.

And as of Oct. 18, the yen’s technicals have continued to erode, as the yen broke below its 200-day moving average and the moving average convergence-divergence crossed below its zero line.

These are all bearish signs that point to the likelihood of the yen’s trend being downward now too.

Now these exporters like Toyota and Honda have the “wind to their backs” as the yen falls and can more easily head higher now.

But let’s say individual stocks aren’t your thing. Then you can go into an exchange-traded fund (ETF) that tracks Japanese stocks, like the iShares MSCI Japan Index ETF (EWJ). This ETF holds some of Japan’s largest companies and has a dividend yield that is comparable to that of the Standard & Poor’s 500’s, coming in at 2.1 percent.

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So this could be a more broad-based way to play the rise in Japanese stocks for the more conservative investor out there.

And just from looking at some really long-term charts of the yen, it looks like it could fall throughout 2013 and maybe through a good bit of 2014 as well.

So if this ends up being the case, like I think it will, then it gives you plenty of time to allow a Japanese ETF or stock to grow.

Therefore, watch what the yen does by tracking it through CurrencyShares Japanese Yen Trust (FXY). When you see what it does, you’ll know what Japanese stocks are likely to do. I believe these next months to years will be bad for the yen but great for Japanese exporters and their stocks.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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