In a test of diplomacy, President Donald Trump will have to carefully balance polar expectations ahead of a summit with Japanese prime minister Shinzo Abe. A harsh critic of Japan — and consequently, Japanese stocks — Trump eagerly called out practices such as currency manipulation. That may be fine for bolstering support among the conservative base, but won’t curry much favors beyond that. But since his victory, Trump’s campaign messages have understandably weighed on Japan stocks.
Not one to let things slide, Shinzo Abe quickly took action. He was the first world leader to meet Donald Trump following his electoral triumph.
Although exact details of that initial encounter aren’t available, the optics certainly looked good. If anything, it provided a reprieve for Japan stocks. After all, Japanese companies have made tremendous investments into the American economy. Anything that would threaten that dynamic would be troubling, to say the least.
Encouragingly, there are signs that Trump is reciprocating the positive vibes. Following the formal meeting in Washington, the two leaders will board Air Force One to play a round of golf in Florida. Trump was insistent that Abe be his partner for the game. That’s a remarkable shift, if you consider the President’s past comments about Japan and Japanese stocks. These included unfair trade deals, manipulative monetary policy and even Pearl Harbor.
At the same time, Japan stocks are in a holding pattern. While Trump’s recent overtures are welcome, his actions are a different story. Shortly after taking office, the President issued an executive order removing the U.S. from the Trans-Pacific Partnership. That, above all else, is probably most problematic for Shinzo Abe. The prime minister spent considerable political capital forwarding the TPP. But without the U.S., the partnership is useless.
Regardless of this hiccup, investors should be overall bullish on Japanese stocks. Although Donald Trump is a difficult man, he’s not stupid. Japan is the most critical American ally in the Pacific region. This is all the more true in the face of a rising China. Indeed, the Pew Research Center indicates that Americans and Japanese have a positive view of each other, especially against this geopolitical backdrop.
Being friendly towards Japan may mean that Trump will make Japan stocks great again. That, however, may be a small cost compared to the overall benefit. Here are three Japanese stocks that will rise on the upcoming summit.
Japanese Stocks to Buy: Toyota Motor Corp (ADR) (TM)
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Among Japan stocks, there are few that have as much influence as Toyota Motor Corp (ADR) (NYSE:TM).
For starters, the Toyota Camry is the most popular car in America, which combines reliability, efficiency and attractive pricing. And because of that popularity, TM made the smart decision to shift production stateside. In other words, many Toyota cars are about as Japanese as a Philadelphia roll.
Considering the developments at TM in recent decades, they have a rightful bone to pick with Donald Trump’s comments. Toyota employs thousands of American workers, and invested billions in American factories in America. The company continues to innovate, which means more American jobs for Americans. Yes, TM technically is one of the bellwether Japanese stocks. Nevertheless, Toyota has, if anything, been one of the reasons why America is so great to begin with.
I’m not too concerned about TM and most other Japan stocks. There’s simply too much at stake for this upcoming summit with Shinzo Abe for Donald Trump to screw up. If he can make peace with fierce rival Hillary Clinton, I’m sure the President will make an exception for Japan. Should all else fail, he can look at the numbers. A strong U.S.-Japan alliance is simply good business.
Toyota played a significant role in that dynamic, and I expect more of the same following the summit.
Japanese Stocks to Buy: Kawasaki Heavy Industries Ltd (ADR) (KWHIF)
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One of the most unlikely affirmations of the U.S.-Japan alliance came from Defense Secretary James Mattis.
Handpicked by Trump, Mattis has a reputation for no-holds-barred toughness. One might expect him to at least be standoffish with Japan, considering Trump’s politically indelicate statements.
Yet the Secretary set off a geopolitical firestorm when he emphatically stood by Japan in the Senkaku Islands dispute. Aside from the consequences — China isn’t happy — investors should consider Kawasaki Heavy Industries Ltd (ADR) (OTCMKTS:KWHIF).
Of the Japan stocks that may be impacted by Mattis’ blatantly transparent remarks, KWHIF stands to benefit the most. While most Americans are most familiar with Kawasaki motorcycles, the company is much more than that. In particular, KWHIF has a defense and security division which produces a variety of military aircraft and ships. Assets such as the P-1 Maritime Patrol Aircraft will be incredibly relevant considering Japan’s rivalry with China.
But it’s the submarine division of Kawasaki that intrigues me the most. As an island nation, Japan’s naval forces will be critical in case of a foreign attack. The element of surprise native to submarines will naturally play a major role in Japan’s security umbrella. And KWHIF has a rich history of building world-class submarines. This means that anytime geopolitical triggers are pulled, demand for KWHIF is sure to rise.
I can only imagine what the world will look like in four years time. Regardless, Kawasaki will be ready for any circumstance.
Japanese Stocks to Buy: Mitsubishi UFJ Financial Group Inc (ADR) (MTU)
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Employing over 100,000 people, Mitsubishi UFJ Financial Group Inc (ADR) (NYSE:MTU) is one of the biggest and most recognized Japan stocks in the markets.
As such, MTU is the go-to financier of Japan Inc. Anything that would impact Japanese stocks, or even the perception of Japan abroad, is sure to attract management’s attention. With the controversial Donald Trump at the helm, many will assume that Mitsubishi is biting its fingernails.
However, such assumptions are inaccurate. Unlike other Japanese stocks, MTU has flourished under “The Donald.” Two days after the general election, Mitsubishi shares popped up 4.5%. Better yet, MTU just kept driving higher.
Presently, its market value is more than 31% higher than on election day, performing on par with its American counterparts. And there’s no doubt this was Trump induced. Prior to the election, MTU was struggling under the weight of poor policy decisions by the Bank of Japan.
Ironically, it was Trump himself that brought such policies to the forefront, albeit in a mean, “Trumpish” manner. When he emerged victorious, his past comments helped spark market volatility and rising bond yields. This has been helpful to all bank stocks, but especially so for MTU. It’s now on pace to exceed its fiscal-year target forecast. Also, Trump’s executive order to reexamine the Dodd-Frank Act is a tailwind for MTU’s U.S. operations.
Prime minister Shinzo Abe will have much to discuss with our commander-in-chief, but Mitsubishi won’t be one of them.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
