5.30.13: Nikkei Correction – It Was Needed – Still Think it is Normal

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Japan’s Nikkei 225 (similar to the Dow Jones in that it is the most oft-quoted stock market barometer) had a monster run prior to its recent 15% correction (down 5% alone last night) but the attached chart indicates that the rally is still intact and this correction was indeed normal and required. The Nikkei is down over 15% in May, but as of May 1, I think it was up over 60% in just the first 4 months of 2013.

The Nikkei has been on fire after new Prome Minister Shinzo Abe committed to growing the Japanese economy and getting the Japanese equivalent of Ben Barnanke (Japan’s Central Bank head Kuroda) to sign on to weakening the yen and expanding the money supply.

The chart above is the EWJ, the iShares MSCI Japan Index, and you can see how, even after the 5% drop last night, the average is just now starting to find support at its 50-day moving average.

It is our opinion that this long-term recovery in Japan’s economy is just getting started. The Japanese economy has been locked in a deflationary spiral since 1988, when the real estate bubble in Japan started to unwind.

Japan has had 25 years to work out of this malaise.

The 10-year Japanese Government Bond (JGB) has risen from 40 to over 90 basis points in yield just this year, which is the best sign that the Japanese economy is improving.

We currently don’t own the EWJ, but it is now of interest to us for client portfolios. Toyota is the largest position in the ETF at 6%, and the EWJ is weighted towards export-oriented companies like the automakers. The caveat is the weakening yen might hurt export-oriented Japanese manufacturers.

The perfect ETF might be one that is long the Nikkei with a short position in the yen.

The Nikkei is not the SP 500 or the Dow Jones Industrials. The Japanese have been locked in a dead economy for 25 years. They are just starting to throw off the deflationary chains.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

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