By
Gary Scott

All of Japan's history from the time it mingled with western civilization and after World War II led to a point where Japan would become the second largest economy in the world. Its strength had reached such highs that the Tokyo Stock Market at one time became the largest (in total capital value) in the world.

During this heyday property prices rose sharply. There was a time when it was estimated that the value of real estate in Tokyo alone was worth more then all the real estate in the entire state of California!

Banks were permitted to make loans against these new higher real estate values. During 1987 and 1988, loans secured by real estate accounted for over half of all new Japanese bank financing. The stock market boomed, with the Nikkei index reaching an all time high of 38,900 by the end of 1989.

When the Bank of Japan decided that the real estate expansion needed cooling off, it raised interest rates. During the first half of 1989, the Japanese discount rate went from 2.50% to 4.25%.

The results were more devastating than anyone could have expected. The market realized that Japan was now a mature economy with all the problems that accrue to nations in that state (i.e. high wages, increased social turmoil, reduced growth, etc.), but shares and real estate were selling at earnings ratios of high growth emerging markets!

During February 1990, the market started to fall. In March the market collapsed and lost almost 30% of its value, with the Nikkei falling to 28,000. This led to a serious recession that lasted for a decade and a half.

Now the Japanese market is awake again.

I personally invested in the Jyske Invest Japanese equity fund in late August 2005 when a unit was worth 7,888 JPY.  Now just a little over four months later the unit price is already 10,068, an increase of 27%.

The Tokyo market's recent strength reflects investor optimism about growing Japanese corporate earnings, not only for the next fiscal year starting in April 2006, but also for the following year.

These expectations are prompting more expectations and this upwards drift is likely to stay solid for the time being because there are no factors to dash these hopes.

More details on Japan are at http://www.jref.com/topsites/index.shtml

This has led Japanese fund managers to raise the weighting of equities in their global portfolios to the highest level in seven months in December, going overweight in domestic shares, a Reuters poll showed.

Falling oil prices also reduced perceived risks in the Japanese equities market.

Japan's recovery has been led by domestic demand and an increase of local and foreign investors. This trend is also likely to grow for some time because Japan’s Nikkei average shot up 40 percent in 2005 compared to the U.S. Standard and Poor's 500 Index, which rose about 4 percent.

Worries about further interest rate rises and a housing market downturn in the United States reduced investors' appetite for American shares as well.

Imagine what would have happened if I had borrowed yen and used the MultiCurrency Sandwich. Yen loans are 1.62%. Had I invested $100,000 and borrowed $200,000 I could have purchased almost 4500 shares. Today they would be worth about $386,000. Interest costs and fees would have been in the $5,000 range so profits of $80,000 or a profit of 80% in four months.

This is why 25% of the Asian MultiCurrency Sandwich we track is in Japan via the Jyske Invest Japanese Equity fund.

You can get more details on this fund from Thomas Fischer at FISCHER@jyskebank.dk.

Until next message, good global investing!

Gary