JAPAN HOLDS UP THE BEST DURING OCTOBER ALTHOUGH YEN HAS BEEN FALLING -- JAPANESE MUTUAL FUND HOLDS UP OK

JAPAN IS TOP OCTOBER MARKET ... A number of readers have asked for an update on the Japanese market. My October 11 message entitled "Why Japan is a Good Global Value" (October 11, 2005) showed the low correlation between Japan and the U.S. over the last fifteen years, and wrote that "Japan may have the best chance of withstanding a global downturn". That wasn't meant to imply that Japan was immune to a downturn. It meant that Japan would suffer the least. The October numbers bear that out. As of yesterday, the Nikkei 225 is the only major global market that has gained ground during the month of October (+1.3%). The S&P has fallen 3.4%. Other major markets in Europe and Canada have lost a similar amount. Charts 1 and 2 compare the Japan iShares (EWJ) to the S&P 500. Since the start of August, the S&P has fallen 4.7%. By contrast, the EWJ has gained 15%. Chart 2 shows the S&P trading below its 200-day moving average. As of today, the EWJ is still trading over its 50-day moving average. The EWJ has done a little worse than the Nikkei during October. That's because the Japanese yen has been falling.

Chart 1

Chart 2

JAPANESE YEN IS DROPPING ... I've explained before that two factors determine the direction of global ETFs like the Japan iShares. One is the direction of the underlying stock market. The other is the direction of the country's currency. While the Japanese stock market has been rising, the value of the Japanese yen has been falling. That causes the EWJ to do a little worse than the Nikkie 225. The weekly bars in Chart 3 show the yen falling to the lowest level in eighteen months. That hasn't hurt the Nikkei which has continued to rise during 2005. It has caused the EWJ, however, to weaken a bit. The solid line below the Nikkei chart is a ratio of the Nikkei divided by the EWJ. During 2003 and 2004, the rising yen caused the EWJ to do better than the Nikkei. Since the start of 2005, however, the falling yen as caused the EWJ to do a little worse than the Nikkei. In the long-term, I doubt that it will make much difference whether an investor places funds in the EWJ or a Japanese mutual fund since both basically move in the same direction. If you're worried about the falling yen, you might want to consider a Japanese mutual fund.

Chart 3

Chart 4

FIDELITY JAPAN FUND HOLDS UP PRETTY WELL ... For most investors, the safest way to commit funds to Japan is through a mutual fund. Chart 5 shows the Fidelity Japan Fund (FJPNX) plotted through yesterday. Over the last two months, the FJPNX has been the strongest global fund outside of Latin America. Notice that the recent pullback in the Japanese fund has been relatively minor. The line along the bottom measures the relative strength of the Japanese fund against the S&P 500. Notice the surge in Japan's relative strength line since the start of August when the U.S. market started to fall and most other global markets along with it. That's an example of a market withstanding global selling. I've never suggested that Japan was immune to global weakness. What I have suggested is that fifteen years of underperformance qualifies Japan as a good global value at a time when other global markets like the U.S. (that have risen over that time span) are looking toppy.

Chart 5