Why Japan Remains in Flux

Times continue to be difficult for Japan, which had been the second-largest economy in the world prior to being surpassed by China in 2010. Find out what Japanese stocks George continues to like.In my last commentary, my investment advice was about the need to invest in emerging markets in addition to the established global economies.

Times continue to be difficult for Japan, which had been the second-largest economy in the world prior to being surpassed by China in 2010. Not only is the country trying to rebound from decades of slow growth, but it is also currently trying to clean up from the horrific tsunami in mid-March that left many dead and some industries in shutdown mode.

There had been hope that the devastation would drive new life and massive infrastructure spending going forward. While there has been new money, the country continues to struggle.

The benchmark Nikkei 225 plummeted 6.2% on March 14 to 9,620 but rallied to 10,004 on May 2 before the current relapse down to 9,562.

Japan finds itself with unemployment at over four percent, which is something that was not the norm in the country’s boom days. The country’s first-quarter GDP contracted 0.9%, with estimates for real GDP to expand at 1.5% this year. From 1981 to 2010, Japan’s average GDP growth was 2.2%, with a high of 9.4% in March 1988, but this seems to be the distant past, based on the soft projections going forward.

The high value of the yen also makes it tough for Japanese exporters and is preventing an export-led recovery. By comparison, China is strong, since its yuan is undervalued, which aids the country’s exports and builds on its massive trade surplus.

It will not be easy to make money in Japan. It would be better to look to China and the four little tigers of Hong Kong, Singapore, South Korea and Taiwan.

However, you should not give up on Japan. There are some good buying opportunities. I like the major Japanese stocks, including Mitsubishi UFJ Financial Group, Inc. (NYSE/MTU) and Sumitomo Mitsui Financial Group Inc. (NYSE/SMFG), which are interesting bank plays.

Famed billionaire and investment guru Warren Buffett said that the weakness in Japanese stocks provides a buying opportunity. You probably want to stick with the blue-chips.

The key in Japan will be government spending to drive the economic renewal. This may include new buildings, roads and various infrastructures, specifically in the areas that were impacted by the tsunami. This means increased demand for concrete, steel and other building materials. An infrastructure buildup also means that workers will need to be hired.

Other than the banks, you want to look at infrastructure stocks, not only in Japan, but also global companies that are operating in the U.S., such as Jacobs Engineering Group Inc. (NYSE/JEC) and Fluor Corporation (NYSE/FLR) to name just two.

You also want to look at companies that provide the building materials, such as concrete and steel. There may be a light at the end of the tunnel, but for Japan, it is quite dim at this time.