Japanese Stocks Feeling The Pressure

New York- The Japanese stock index called the Nikkei continues to under-perform world markets as the global recession ends. The Nikkei is up 28% from its March 2009 low this compares to the Dow Jones which is up 55%. Despite this under performance Edwards was quick to point out he isn't exactly recommending to buy Japanese stocks at the current time. Edwards stated "I would maybe consider buying Japanese stocks if you can buy it on their actual index but it is not worth it to buy a Japanese stock on the American exchanges." Edwards looked at Sony Corporation, a company which has a book value of $27 a share and is one of the leading and most respected technology companies in the world, but Edwards is not recommending to purchase its stock. Edward examined the performance of Sony stock in Japan vs. Sony stock in the U.S.









As can be seen Sony U.S. has outperformed Sony Japan by 16% in the last 3 months. All of this can be attributed to the currency move between the U.S. dollar and the Japanese Yen. This makes it unprofitable to buy Sony on the American exchange at the moment unless you were to hedge the currency portion of the trade. The Yen is up 45% since 2007 and this makes it extremely risky to invest in Japanese companies unless you are a resident of Japan. The quandary for investors of Japanese companies on the American exchange is that if the Yen decreases it would be good for Japanese companies since now their merchandise can be sold for lower price in foreign markets and each company makes more money in Yen per sale.

However these improving prospects can hurt American investors as the Yen will decrease in value meaning the value of the investment also drops on that exchange. If the currency were to drop to its 2007 level an investment in a Japanese company on the American exchange would lose 29% of its value therefore a stock would have to increase more than 41% in Japan just to break even. (Take a $40 stock and imagine it trades exactly equal on the beginning date in both stock exchanges. Now the $40 stock increases in value by 29% it will be worth 51.6, but if the Yen decreases 29% then the stock will now be worth 36.63 on the U.S. exchange but it would be up 29% on the Japanese exchange. This means an investor can make a sound investment in a company but lose money if the Yen decreases.)

This is a double edged sword for investors who want the Yen to go down so their companies will be more profitable, but at the same time the Yen decreasing will temporarily hurt their actual returns. "Quite a conundrum" said Edwards.