Whither Japan Stocks: Jim Rogers Likes Blue Chips And The Yen; More To Come From Abenomics

I had a chance to meet fabled "investment biker" and "Asia Century" enthusiast Jim Rogers at last year's

English: American investor Jim Rogers in Madrid (Spain) during an interview. Español: El inversor norteamericano Jim Rogers en Madrid (España) durante una entrevista. (Photo credit: Wikipedia)

FreedomFest in Las Vegas. He was selling a new book, but also contributed a lot of contrarian investment wisdom and ideas on the panels. What he did not divulge was that he had been a buyer of Japanese stocks after the March 2011 Tohoku/Fukushima disasters and would become a bigger buyer under Abenomics.

Rogers was interviewed by the Nihon Keizai Shimbun at his Singapore home on January 20. He offered that he increased his Japanese equities position in November 2012 when then candidate Abe began calling for strong reflationary measures from the Bank of Japan (BOJ).  He continued buying during 2013, favoring Japan-related ETFs and agribusiness stocks.

Rogers told the Nikkei that he recently bought Japanese blue chips, expecting that Japan's retail investors will favor blue chips as they begin funding newly offered NISA (Japanese-version IRA) accounts.

Rogers is a contrarian who sees prevailing market sentiment as a sell signal. Asked whether he is hedging his Japanese equity positions, he said that he thinks the market has oversold the yen on expectations of continued yen depreciation and that a reversal to yen strengthening is possible.  He has stopped hedging.  Last week he bought NTT (NYSE:NTT) with no hedge.

Rogers is watching closely the rollout of Abe's "Third Arrow" economic growth strategy (more below).  He worries that uncontrolled BOJ money printing could destroy the country.

I agree with Rogers on most things, including—or maybe especially–his long-term bullishness on China. (News today in Japan's newspapers that China's nominal GDP in 2013 rose to about double Japan's.) Last July in Las Vegas Rogers averred that China's human rights and legal system failings should be seen as part a societal transition, and will eventually be corrected. The only real threat to China's continued development and increasing prosperity is ensuring adequate sources of water.

Asked at FreedomFest for his best investment ideas, Rogers talked without irony about North Korea. If North and South Korea united the country would become a manufacturing powerhouse to rival Japan. The difficulty is finding ways to invest in North Korea.

Back in Japan from some estimable economic diplomacy in the Gulf and Africa, and before departing to give the keynote address at this year's Davos Forum in Switzerland, Prime Minister Abe Shinzo has been heralding that Abenomics and his "Third Arrow" has much more to offer.

Two important policy committees, both officially chaired by Abe, are working on proposals and draft legislation to promote economic growth and competitiveness.  Both committees aim to produce recommendations in June.

The Council on Economic and Fiscal Policy met for media benefit on January 20, allowing Abe exhort it to craft reforms that will spur growth over the next 10 for 15 years. The committee's private sector members created a burst of media buzz by calling for a 10 point cut in the corporate rate, to 25%.

According to its advocates, lowering the corporate tax rate is critical for attracting growth-producing foreign direct investment into Japan. After terminating the Tohoku disaster reconstruction surtax last year, the effective corporate tax rate (in Tokyo) is dropping this year from 38% to 35.64%. This is about 5 points lower than the effective U.S., but it is still well above the rate prevailing in Japan's rivals for investment, China (25%) and South Korea (24.2%).

The disadvantageous tax rate is one factor in Japan's poor record in attracting FDI.  Last year, while foreign portfolio investors poured some JPY 15 trillion (USD 144 billion) into traded Japanese equities, direct investment in new ventures, plant & equipment, and M & A hardly increased. Aggregate FDI in Japan at the end September 2013 was JPY 18.1 trillion, up a mere JPY 0.3 trillion from the end of 2012.

Abe is pushing for reforms to make Japan a better place to do business. The Council for Industrial Competitiveness is the other committee he chairs that exists specifically to produce "Third Arrow" initiatives. This committee also met on January 20, appropriately at the Prime Minister's residence. Deregulation in medical services, agriculture, construction, and employment (including foreign workers) will be among the key reform initiatives.

In Prime Minister Abe's frenetic personal economic diplomacy and forceful domestic policy leadership we sense a stark and unnerving reality. Looked at critically, Abenomics is in many ways a desperate gamble, a (risky) race against time. Abenomics is a "Hail Mary" throw to win in a game that Japan has been losing. The game is: Can Abenomics' pro-growth policies raise national income and begin to restore fiscal health before being bankrupted by its welfare state?