| DAILY ISSUE This Once-Forgotten Market Is Quietly Beating the S&P — Here’s How to Play It VIEW IN BROWSER Hello, Reader. Renewal. Recovery. New beginnings. As the unofficial, but widely recognized, flower of Japan, the cherry blossom represents the blossoming of fresh starts and the communal joy of sharing in such. It is a fitting symbol for this week’s rally in Japanese stocks. This weekend, Sanae Takaichi was named the new leader of Japan's ruling Liberal Democratic Party. This all but guarantees that she will become prime minister. Now, investors see this as a sign that Japan may resume aggressive government spending and a continuation of loose monetary policy. Takaichi supports bigger government budgets, more infrastructure and defense spending, and low interest rates. Basically, increased spending. And more spending typically means more growth. That is why the Nikkei 225, Japan’s benchmark index, jumped to record highs following Takaichi’s election. It closed above 47,000 for the first time on Monday and opened above 48,000 on Thursday. The Tokyo Stock Price Index (TOPIX), which tracks domestic companies, also rose this week, as did Japanese ETFs. This reflects broader enthusiasm in Japanese equities. But when governments spend more and the central banks keep rates low, currencies tend to weaken. So, while Japanese stocks and funds rose on Monday, the yen weakened 0.11% to ¥150.49 against the U.S. dollar. Now, in order for the weakening yen to be a positive sign for a Japanese rally, it’s important that it weakens slowly, around ¥150–155 per dollar. It is currently trading around ¥152 against the greenback. This would support exporters. A weaker yen helps Japan’s big exporters – like Toyota Motor Corp. (TM) and Sony Group Corp. (SONY) – because their overseas profits are worth more in yen. The bottom line is that Japan’s current rally is built on hope — hope that fiscal stimulus and monetary easing could equal growth and profits. But, of course, Takaichi, isn’t prime minister yet. Regardless, this week’s rally follows an already increasing interest in the Japanese economy. So in today’s Smart Money, let’s take a look at the strengths driving Japan’s market higher. I’ll share my continued outlook for this foreign market… and the best way to capitalize on the current opportunity. Let’s dive in… From Lost to Found The Japanese economy has already regained a solid financial footing since its “Lost Decades” – when the Nikkei 225 tumbled nearly 50% within nine months of hitting its all-time high in 1989… and continued sliding lower for two decades. But from that low-water mark, the Japanese stock market started a long road back to respectability and relevance. For example, domestic consumption has been trending higher for the last four years. During the last three years, retail sales growth has surged more than 3.5% per year. That rate is 20 times higher than the compound growth rate of the preceding 30 years. Consumption will likely continue to lead Japan’s GDP growth, thanks to strong employment and wage growth trends. The unemployment rate has dropped to just 2.6%, which is close to 30-year lows. At the same time, annual wage growth is accelerating by nearly 3%, which is a 30-year high. Acknowledging these trends, the Bank of Japan upgraded its assessment of private consumption from “resilient” to “projected to increase moderately, mainly reflecting the rise in wage growth.” Japanese businesses are also opening their wallets and spending. Capital investment rose 8.1% in 2024 and is trending sharply higher. Expressed as a percentage of GDP, capital investment has climbed to 26%, which is the highest level in 16 years. Japanese stocks are beginning to reflect these positive trends, and three powerful factors could combine to boost their share prices sharply higher… - Japanese companies have become more devoted to returning capital to shareholders.
- The Japanese government is incentivizing individual investors to buy stocks in their retirement accounts.
- Mergers and acquisitions are on the rise. A growing number of Japanese companies are using their large cash reserves to acquire other companies.
As positive economic trends build upon one another, Japanese economic growth should continue to accelerate, lighting further fire under Japanese stocks. In fact, at the start of this year, I predicted that “lowly valued… foreign stock markets [would] outperform the S&P 500 this year… the Japanese stock market, for example, could deliver a surprisingly strong performance.” And so far, my prediction has come true… How to Capitalize on Japan’s Outperformance Year-t0-date, the Nikkei 225 has advanced 20%, compared to the S&P 500’s 14% gain. I expect this outperformance to continue. The bottom line is that Japanese stocks are strong right now, riding a wave of optimism around expected stimulus, favorable policies, and a weak yen. To capitalize on the opportunity, I recommend using a “broadbrush” approach. Specifically, I recommend a $12.9 billion ETF devoted to Japanese stocks. Six of the top 10 holdings in its portfolio are major exporters and will benefit from a weaker yen. Additionally, this trade offers a compelling way to diversify from U.S. stocks. Assuming the Japanese economy continues its current growth trajectory, this play could produce solid double-digit gains for several years – even if the U.S. stock market falters somewhat. You can learn how to access the name of my broadbrush Japanese recommendation by joining me at Fry’s Investment Report. As a member, you will receive all of my latest research, alerts, and updates – including my continued outlook on Japanese stocks. Click here to learn more. Regards, | 
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