What about this Japanese stock rally?

by admin on January 7, 2013

Could everyone who has been long Japanese stocks raise their hand? Oh, that’s right – we can’t do that because we have armfuls of profits. But whatever your position, you are now asking one of these two questions:

1. Is it too late to get into this rally?

2. Should I be taking profits, and if so, in what?

If you are asking along the lines of 1., you need to think about the point of what you’re doing.

If you’re looking for a short-term pop, then the risk-reward balance is not terribly good. Even the FT has an article about the “Abe Trade”. I hope I do not need to point out to you that this is a contrary indicator.

If, however, you see this as the catalyst for the reawakening of the entire Japanese market, then you have answered your own question – simply have patience, investigate names that are underpriced and have good fundamentals, and standby.


Before I address 2., my take on the situation the following:

This rally is not the same as January/February 2012

At that time, there was a real deep gush of liquidity into the stock market, and you could see the relative outperformance of illiquid stocks more clearly. Whereas, at present it seems that there is a forex-driven aspect to this rally more so than liquidity-driven one. If that does not seem to make sense, than what I’m saying is it appears to me that there has been a relatively lower incidence of outperformance of illiquid stocks, suggesting to me that the primary driver is changes in fx being reflected in largecaps, and this has been driven by considerations of export conditions and expectations of BoJ action, rather than actual new BoJ money flooding into the general market.

If this observation is correct, then that means either of the following situations are true:

i. Small caps need to catch up as more liquidity enters the market; or

ii. The forex move is not sustainable in the short-term

What worries me about the rapid sharp depreciation of the yen is that it has occurred during a quiet period in the markets, that the yen has already moved past the breakeven rate (as far as I remember it) for Japanese exporters, and that it is taking on the signs of becoming a crowded trade.

Any rational market observer would be encouraged by a short-term reaction with yen sellers taking early profits, or corporations locking in forward rates, etc. If the market could absorb that kind of reaction and then continue to move in the same direction (downwards for the yen), then it would be a sign of this move being more than just a blip.

Therefore, I feel it necessary to put a greater weighting on the probability of Situation (ii) than (i).

(In answer to Q2): This is why I am starting to cut positions in names that have run quickly in a short time, such as

富士機械製造  (6134)


富士機械製造 富士機械製造

Rokko Butter:

Rokko Butter Rokko Butter

and, adding to companies where I think the thesis is a bit longer-term than a “junk rally” (btw – you should have been buying some junk in Japan in anticipation of this), but which have not moved much short term, such as




アーク アーク

(I might write about these stocks later)

Indeed, it seems that the Japanese market often has no rhyme or reason for certain stocks to suddenly outperform – one example is Daiken Medical, which, unfortunately, I sold before the big rally:

Daiken Medical Daiken Medical

There are many stocks like this which have no news, and then suddenly rally very sharply for no apparent reason (SMS is a great example). Of course, the western markets are highly illogical as well, but at least there seems to be an “excuse” for movements there.

Finally, I want to say something about long-term positioning.

You know who said this, right?

In a bull market your game is to buy and hold until you believe that the bull market is near it’s end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps!

Ok, you must know by now who this is:

“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now
I’d lose my position; and then where would I be?”

Jesse Livermore is perhaps not the best role model, as he ended up killing himself. However, his advice is priceless even if you are focused on value.

Let’s keep this in perspective – the reason why you are here (in the Japanese market) is not because this has been a raging bull market to date. This is a huge bottoming out of stocks in one of the major economies of the world. What took 20 years to destroy will not be rebuilt in one quarter. Don’t lose your nerve, don’t lose your position, and keep on hunting for real value.

{ 6 comments… read them below or add one }

catsick January 8, 2013 at 5:56 pm

Been following your excellent site for a couple of months now, and bought in to a couple of the stocks you have discussed such as Mitani and Proto, I have a bunch of other small caps in Japan which have also exploded recently from extremely low valuations such as ASAX and Paraca and am facing some of the same issues you have discussed, there seems to still be a lot of cheap stocks to rotate into from ones that have popped so I think for now the staying long but rotating around seems to make sense …


admin January 8, 2013 at 8:28 pm

Thanks Catsick. Every day I find stocks I am adding to or buying just running up like nuts. I thought Japan was a dull market or something. JP


Feuerball January 9, 2013 at 2:16 pm

If you do your accounting in US$, like I do, half of your profits from that rally were eaten up by currency losses. So in that sense, the rally wasn’t that great or in in other words, the natural currency hedge was working :-(


admin January 11, 2013 at 6:58 pm


I do my accounting in Japanese yen, and I’m happy with it that way. But I can see that you don’t like to lose on currency.

What is curious, however, is that nobody seemed to be applauding the yen gains in previous years. We have basically come full circle in the price of the yen since 2010, and are not even yet back to 2009 levels.

If you are particularly good at trading currencies, then you are lucky – I can’t even tell the difference between the euro and the dollar anymore.

There is a lot of negativity about the yen, and predictions about it collapsing and such, but I think that fundamentally a lot of it is misplaced. Sure, it can go down some more, and even should, but at the end of the day what matters most is that Japan exports a huge amount of stuff, and will probably continue to do so even as it ages.

Now, the trend in net export earnings has been negative, particularly because of natural gas imports. But, you see, unlike the British pound (which I detest), a fall in the yen will stimulate factors which will lead to demand for the yen. The UK exports services, and repricing them down will not really impact the volume produced or exported. Japan has, broadly speaking, a lot more operational leverage – repricing its production down will cause a relatively large increase in demand and volumes, leading to … demand for the yen.

This self-correction mechanism, ultimately due to the fact that people want things that Japan makes, means that I can’t be that pessimistic about the currency long-term. Also, the breakeven rate for manufacturers has been moving down with time, as companies become more efficient.

Now in terms of monetary things, most of the yen in the world is stuffed under mattresses. The only way for that yen to get put onto the market is for people to go out and spend (or invest) it. But, Japan is also a huge exporter of capital – If capital starts flowing back into the country, then imagine what will happen (however, in reality, global growth coincides well with capital leaving Japan, as it is a lender, not a borrower like Greece).

Lastly, there is no big overseas yen (or bond) holder who might suddenly turn pessimistic on the country and cause a crisis.


catsick January 9, 2013 at 3:07 pm

Feurerball , What I would reccomend is opening an account with saxo where you can trade fx options at excellent spreads , going into this big rally yen fx option vol was also insanely cheap so you could buy long term option protection by paying away 1/3 of you dividend yield, this strategy has worked brilliantly on this move … and you also would have kept the upside from yen appreciation .


Feuerball January 13, 2013 at 5:56 am

I am Ok with my yen exposure and approx. half of my equity exposure japanese stocks (which is not that big <10%)is hedged with a short in Yen. I am justing pointing out, that the rally is not looking that great, if you are Foreign investor looking at it in their native currency.

If you do own companies in the export business, you are naturally hedged anyways, even without having a short position in Yen, imo. I do agree that this rally might just getting started if the yen continues to weaken.


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