Free-Spending Japan Now Headed to Economic Recovery?

By George Leong

It’s official: free-spending Prime Minister Shinzo Abe along with his Liberal Democratic Party and its alliance with the New Komeito Party will control the fate of Japan for the next few years. This will be enough power and support to push forward Abe’s massive and ambitious $1.2 trillion 10-year spending plan to drive the country’s economic recovery and battle deflation.

After being comatose for over two decades, something had to be done in Japan, but whether this strategy to drive the economic recovery will work or not is still unclear.

At the recent G20 meetings, ministers applauded Abe’s aggressive monetary and fiscal stance to drive the country’s economic recovery. The countries also acknowledged the aggressive moves by Federal Reserve chairman Ben Bernanke to keep the global money printing strategy going and push ahead America’s economic recovery.

But the problem that I still see is that along with massive money printing comes the significant build-up of debt, which will come into play in the future as interest rates ratchet higher.

Make no mistake about it: debt will likely become a burden over the next few years and could impact the economic recovery down the road. Just take a look at Greece, Portugal, Italy, and Spain.

Also Read: NYSE Holidays 2013

The expected win by Abe will also help to lift the optimism for global stocks, which will likely move higher as long as the easy monetary policy is maintained.

In the case of Japan and Japanese equities, it has been a great ride upward so far. In fact, it’s been much better than I would have thought and the equities could rise higher if the economic recovery pans out.

The benchmark Nikkei 225 surged 70% in about six months, prior to the correction in late May that drove the index down 22% and into bear territory. The correction only lasted a few weeks, as the Nikkei subsequently rallied and is currently down only 8.5% from its recent top.

The chart for the Tokyo Nikkei Average Index is featured below:

Chart courtesy of www.StockCharts.com

This chart shows a potential retest of the May high—if the index can break above its previous upward trend line (represented by the blue line). Watch for this potential move.

So, while the Nikkei has ramped upward at a pace that is faster than reasonable, the fact that so much money will be pumped into the Japanese economy along with a weakening yen will help to support Japanese equities and drive the economic recovery to the point where there could be a buying opportunity.

If you are looking at playing the Japanese stocks and the potential economic recovery, I would personally stick with the large companies.

The top financials that can trade off a Japanese economic recovery are Mitsubishi UFJ Financial Group, Inc. MTU and Sumitomo Mitsui Financial Group, Inc. SMFG; industrials include Mitsubishi Corporation (OTC/MSBHY) and two of the world’s biggest car makers, Honda Motor Co., Ltd. HMC and Toyota Motor Corporation TM.

This article Free-Spending Japan Now Headed to Economic Recovery? was originally published at Investment Contrarians