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  Japan? Buy?

BENJ GALLANDER and BEN STADELMANN

Friday, November 8, 2002

While many investors are digging through layers of dense charts and using complex mathematical theorems to ascertain whether the market has reached a bottom, one of our recent ultra-contrarian purchases was more a function of the "KISS" principle (Keep It Simple, Stupid). Have a look at the Japan Equity Fund (NYSE: JEQ) at $4.66 (U.S.).

How simple was the logic of this buy? At its core is the supposition that, unlike the poor soul who eats ill-prepared fugu, the Japanese economy will not succumb to irregular palpitations. The nation is full of hard-working and well-educated people, and remains on the cutting edge of technology. It seems clear that the nation will eventually pull itself out of its quagmire and progress toward the mean.

Many people disagree, of course, and suggest that Japan's banking system is on the verge of complete collapse and that many of its major corporations are quaffing their last breaths on life support. To these observers, the question is not if, but when, these near-corpses will be sent to the great beyond. While this fate undoubtedly awaits some enterprises, the vast majority of Japanese companies will survive and eventually thrive again.

The situation reminds us of the U.S. in the 1980s. Back then, the U.S. banking system was deemed to be on its last legs. Remember the "Third World Debt Bomb"? It was supposed to spark a cataclysm that would buckle the American economy. Heck, even the currency of the great nation was sliding to banana status, and the plight of America was such that business leaders looked to the industrial might of Japan for answers.

In those woebegone times, our cynicism led to the purchase of two entities on the apparent verge of collapse, the Bank of America and the Continental Illinois Bank. Ultimately, both returned handsome gains.

More simple logic applies to the Japanese situation. The stock market has been down and out for about 12 years. History indicates that virtually every economy that undergoes this kind of beating eventually turns around. Conservative probabilities therefore dictate that given the long span in the doldrums, the Japanese market should double in the next 10 years, still leaving it less than the halfway to its previous high.

While we normally eschew funds, JEQ, which is managed by Daiwa Securities, has a management expense ratio of only 1.08 percent and currently is trading very close to its net asset value. Daiwa does no currency hedging, so this is also a play on the yen vs. the U.S. dollar.

Is the basis of our logic too simple here? Per usual, time will tell. Our target price is a relatively low, by Contra standards, $7.14. If the U.S. economy continues its implosion, capital might start searching for another isafei haven, which might make Japan as popular as the ever-multiplying sushi restaurants on this side of the ocean.


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