After the 2011 tsunami and subsequent meltdown of nuclear power plants owned by Tokyo Electric Power Company, nuclear energy fell out of favor with the general public and Tokyo Electric Power Company, or TEPCO for short, was forced to shut down many of its plants and pay millions in reparations to those damaged from the meltdown.
A change is currently underway in terms of nuclear energy. While Japan’s general populace is against nuclear energy, many believe that Abe plans to allow for more nuclear plants to be put back on-line.
If this shift does occur it is possibly that TEPCO will continue to see its losses continue to go down, and may even see positive earnings in a couple of years. That will potentially be a huge boost for the stock.
The main risk, however, is that nuclear energy may not play as prominent a role in Japan’s energy infrastructure as many people had expected it to, and many energy companies may not see huge increases in their ability to build or reopen plants.
When Shinzo Abe made the announcement of his plan for the third arrow of Abenomics, the stock prices power companies such as TEPCO actually went down. Abe had not mentioned nuclear energy during his speech, as many had expected, and instead focused on increasing competition within energy markets. If Abe’s third arrow does not play out exactly as many had expected it to for nuclear energy companies, then shares of TEPCO will likely continue to perform poorly.
While Tokyo Electric Power Company does have the potential to do well, I’m staying away. Too many things have to go right in order for the company to make a good return.
Companies such as Tokyo Electric Power, Mitsubishi Heavy Industries, and Toyota Motor Corporation (ADR) (NYSE:TM) all have the potential to benefit from Abenomics, but there are many things that can go wrong. Each of these companies has many moving parts and trying to figure out which one to invest in can be extremely difficult. Perhaps buying individual stocks is not the best way to profit from Abenomics.
A Better Way to Invest in Japan
While Abenomics provides many potential opportunities in individual names, it may just make more sense to buy an exchange-traded fund (ETF) that invests in a basket of Japanese stocks. There are many to choose from, but the one that will likely benefit the most from Abenomics is the WisdomTree Japan Hedged Equity Fund (NYSEMKT:DXJ). The WisdomTree Japan Hedged Equity Fund (NYSEMKT:DXJ) invests in the Japanese equity markets, and then shorts the Yen against the dollar. This allows investors to benefit from nominal rises in Japan’s stock market while not being hurt by a decline in the value of the Yen.
Because Abenomics relies on a depreciating Yen, investors in individual stocks could see losses even if their investments go up because they will have to convert their Yen to USD at a possibly lower exchange rate than when they bought the stock. The WisdomTree Japan Hedged Equity Fund (NYSEMKT:DXJ) hedges against this risk, as well as the risk involved in only buying individual names.
Sometimes the simpler solution is the best one. And I think this is one of those times. The Japanese stock market is complicated, and picking out individual winners is even more difficult. By buying the DXJ the average investor can gain access to a diversified basket of Japanese stocks and benefit from the three arrows of Abenomics without having to worry about any individual name in their portfolio.
The article Invest in This Country Now for Great Returns originally appeared on Fool.com and is written by Kyle Farrah.
Kyle Farrah has a long position in DXJ. The Motley Fool has no position in any of the stocks mentioned. Kyle is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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