The 20-Year Cycle – Investment Ideas

I know what you’re thinking. Not another article about investing in Japan!

But what if I told you that the re-birth story for this nation is real? And that this is just the start of a new wave of growth that will lead to many years of stock market gains, just as we saw in the U.S. after we climbed out from under the Great Recession.

You owe it to yourself to understand the true and amazing nature of the “20-Year Cycle” at work in Japan. And how the last 20 years of stagnation will be wiped away with perhaps 20 years of growth and prosperity ahead.

A Look Inside Japanese Rebirth

To begin to understand the origin of Japan’s 20-year cycle, recall that trees and stones have long been objects of deep devotion in Japan. Originally there were no shrine buildings. Instead a tree, forest, a large boulder, or a mountain, festooned with ropes, would be the focus of worship.

Nature worship was then ported into a set of buildings. The Ise Grand Shinto nature shrine, in central Japan, is one of the grandest. It consists of two groups of wood buildings — Naiku and Geku. Now, you might not believe this, but every twenty years, Japan totally rebuilds these two 1300 year-old shrines to nature on an adjoining site. The idea? Experience a once-in-a-generation renewal.

In 2013, the Japanese tradition of a 20-year renewal provides the key insight into Japan’s economy.

More . . .


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The Demise of 20 Years of Deflation

One chart (below) shows what Japan was dealing with. After a 20-year boom, led by real estate and stocks, Japan staggered under a 20-year deflation. From the early 1990s, the economy never recovered to the goldilocks of a +2% annual inflation rate, the hallmark of a ‘good’ financial system.

Japan’s Rebirth

At the end of 2012, Japan elected reformer Shinzo Abe. He shot three arrows.

(1) Print Money to Raise Prices

In April 2013, the Bank of Japan targeted a +2% annual inflation rate. A radical plan, crafted with an eye to U.S. quantitative easing, buys roughly $75B in bonds each month until March 2015. Printing money helps raise prices.

Higher prices mean higher profits & stocks — and much happier companies.

(2) Weaken the Yen

Some Japanese exporters were profitable at 80 yen to the dollar, so 100 yen must be a huge boon. Consider a Zacks Rank #1 Japanese stock, the world’s largest maker of small tractors. A weak yen makes its overseas revenues (42% in total) more profitable. This hits companies outside Japan too – like Korean, U.S. and German automakers. They face a squeeze on profit margins.

Imagine what 110 yen to the dollar could do in twelve months?

(3) Japan Spends First, and Taxes Later

Finally, rather than reduce a huge government deficit, Japan did the opposite. The new prime minister increased spending to create jobs. But Japan’s budget deficit last year was above 10% of GDP. Its gross debt is more than 245% of GDP. Inevitable tax increases are delayed. Japan’s planned sales tax hikes go from 5% to 8% in April 2014 and to 10% in October 2015.

Japan thinks its renewed strength can overcome these tax hikes.

Results Begin to Build

Results are building. Japan grew at a +3.8% rate in Q2, following a +4.1% rate in Q1. In comparison, the U.S. clocked +1.8% GDP growth. Where did Japan stocks go? The Nikkei 225 recently closed around 14,400, up +40% this year.

These are the kinds of stellar returns out there for the taking.

Just the Beginning

It is still early in this story of Japan’s re-birth. But if Japan’s spirit has renewed itself, you can see this as just the beginning of a 20-year upswing. That is the national myth, with origins deep inside the soul of the country. As long as Japan’s policies serve as catalysts, equity investors can pocket outsized profits.

A World of Opportunity

Japan is but one of many developed, politically stable countries that offer investments with thrilling upsides, in part because their economies are projected to grow much faster than the U.S.

Also, with domestic stocks trading at a premium, there are several non-U.S. regions that offer substantial valuation discounts. This means you can buy better companies at lower prices.

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Good Investing,


John J. Blank, Ph.D., a noted global economist, is Zacks’ Chief Equity Strategist. He will lead an exclusive investor group to the world’s most exciting investment opportunities with his new International Trader portfolio.

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