| WEEKLY ROUNDUP Hello, Reader. Do you remember 1990? That was the year when Driving Miss Daisy won Best Picture at the Academy Awards, and when Tom Cruise and Nicole Kidman tied the knot. But 1990 was also the year that Japanese businessman, and golf enthusiast, Minoru Isutani spent $841 million to buy California’s iconic Pebble Beach Resorts. This high-profile transaction marked the peak of the Japanese economic “miracle” that dominated the world of finance throughout the 1980s. By the end of that decade, two-thirds of the world’s 50 largest companies were Japanese. “Japan Inc.” was a marvel without equal. Japan’s awe-inspiring might throughout that period was not merely an economic phenomenon. It was a seismic sociological event that inspired a mythology of Japanese economic superiority. But just as the new mythology was becoming irrefutable gospel, it faltered and became a relic of financial history. Japan’s “Lost Decades” followed. Within nine months of hitting its all-time high in 1989, Japan’s Nikkei 225 index had tumbled nearly 50%… and it continued sliding lower for two decades. Finally, in 2009 the Nikkei hit its ultimate post-bubble low. At that point, the once-mighty Nikkei had collapsed nearly 80%. But from that low-water mark, Japanese stocks started a long road back to respectability and relevance. Finally, last February, the Nikkei surpassed its ancient all-time high of 38,957. The Nikkei’s resurgence over the last couple of years could be signaling a new era of superior economic growth. Already, the Japanese economy has regained a solid financial footing. Japanese businesses are also opening their wallets and spending. Capital investment rose 8.1% last year 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, but their valuations remain subdued, relative to both their own history and to U.S. stocks. At 15 times earnings, the MSCI Japan Index is trading nearly 20% below its 30-year median level… and 43% below the current valuation of the S&P 500. But these depressed valuations may not persist for long. Three powerful factors could combine to boost Japanese 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, with 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 accelerate, which would light a fire under Japanese stocks. Even modest economic improvement could produce outsized stock market gains. To capitalize on the nascent opportunity Japanese stocks are offering, I recommend using a “broadbrush” approach. Specifically, I recommend a $12.9 billion ETF devoted to Japanese stocks. Already, shares of this ETF are up nearly 5% since I recently recommended it to my Fry’s Investment Report subscribers, due to the news that the Bank of Japan will raise rates to their highest levels in 17 years. All else equal, higher interest rates raise the value of Japan’s currency, making its stocks more attractive. Importantly, this trade offers a compelling diversification 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. To learn more about this recommendation, join me at Fry’s Investment Report today. As a member, you will also receive all of my latest research and recommendations. My team and I are actively researching and vetting additional prospects to introduce to our portfolio. Now, let’s look at what we covered here at Smart Money this past week… | 
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