Master the Nikkei: 4 Japanese Stocks to Buy

Since arriving stateside on Sunday, April 26, Japanese Prime Minister Shinzo Abe quickly set the tone for his weeklong visit, stressing the importance of bilateral cooperation between the United States and Japan.

Nikkei Japan stock market
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Source: Source: JYE Financial, unless otherwise indicated

Such broad fundamental catalysts provide an excellent backdrop for Japanese stocks.

The nation’s benchmark index, the Nikkei 225, is up 12% year-to-date and may be forming a bullish rounding bottom pattern, which suggests significantly more upside for Japanese stocks in the future. Unlike the Dow Jones Industrial Average, which comparatively is up only 2.5% over the same time frame, the Japanese markets benefit from a dovish “at any cost” monetary policy established by the Bank of Japan.

This key advantage bodes particularly well for American investors, who benefit from rising stock prices without incurring the loss of purchasing power due to inflationary policies.

Here then are four Japanese stocks to pick up right now.

Japanese Stocks to Buy: Mitsubishi UFJ Financial Group Inc (ADR) (MTU)

On April 22, Mitsubishi UFJ Financial Group Inc (ADR) (NYSE:MTU), one of the stalwarts of the Nikkei index, became the “first foreign lender in decades” to open a branch in the often politically embattled nation of Myanmar. According to Mitsubishi UFJ’s chief executive officer, Go Watanabe, banking applicants for the Myanmar market were required to invest a minimum of $75 million, but the Japanese lender instead forwarded $100 million.

This strong signal of intent underscores Japan’s efforts to counter China’s economic influence and to establish a positive leadership role in Asia. It may also be a small but confirming indication of confidence toward Japan’s iteration of quantitative easing, commonly dubbed “Abenomics.”

Japanese Stocks to Buy: Mitsubishi UFJ Financial Group Inc (ADR) (MTU)
Source: Source: JYE Financial, unless otherwise indicated

One thing is certain: Technical momentum (on both a broad and immediate framework) is very bullish for MTU stock.

Since bottoming in 2003, Mitsubishi shares have formed a rising support channel that is still intact today. Ten years later, MTU stock formed what is known in technical analysis as a bullish pennant formation, which led to a strong breakout move that is currently challenging the upper ranges of the aforementioned support channel.

Given the consistent and established trend in MTU stock, Mitsubishi will likely be one of the best gems among Japanese stocks for years to come.

Japanese Stocks to Buy: Sumitomo Mitsui Financial Group, Inc. (ADR) (SMFG)

Similar in vein to Mitsubishi UFJ, Sumitomo Mitsui Financial Group, Inc. (ADR) (NYSE:SMFG) announced their intent to enter the Myanmar lending market, along with five other foreign competitors. But Sumitomo has other aspirations as well, including signing on as a sponsor for the 2020 Tokyo Olympic Games. Together with local partner Mizuho Financial Group Inc. (ADR) (NYSE:MFG), the two companies were granted exclusive rights in the banking category by Olympic organizers.

Not everyone, though, has been supportive of the bullish argument for Sumitomo. According to an April 10 article by TheStreet, SMFG stock had recently formed a “textbook” head-and-shoulders formation, a common reversal pattern with bearish implications. This condition earned SMFG as one of five toxic stocks that needed to be sold immediately.

Fortunately, SMFG stock not only countered the inherent assumptions of a head-and-shoulders pattern, it did so with explosive magnitude, closing up 14% above the $7.70 “neckline” threshold recommended by The Street.

Given SMFG’s average 2.67% performance over the past four weeks, there is a 75% probability that by the end of May, shares on average will be trading 6% higher.

Japanese Stocks to Buy: Sumitomo Mitsui Financial Group, Inc. (ADR) (SMFG)
Source: Source: JYE Financial, unless otherwise indicated

On a wider scope, Sumitomo shares have formed a sharply inclining trend channel since early 2012. A top-heavy failure that was precipitated by a bearish wedge formation a year-and-a-half later resulted in a collapse of SMFG’s price, but it nevertheless managed to keep the support channel intact. This suggests a possible challenge of the $10 area — where the bearish wedge occurred — as momentum is clearly acting as a tailwind for SMFG stock.

Japanese Stocks to Buy: Honda Motor Company Ltd (ADR) (HMC)

Of the four Japanese stocks mentioned in this article, Honda Motor Company Ltd (ADR) (NYSE:HMC) would easily be considered the most speculative. That’s because HMC stock took a battering in the markets following the release of Honda’s fourth-quarter earnings report. Adding insult to injury, compatriot Nomura downgraded its prospects for HMC stock.

Let’s start with the bad news. Earnings per share declined to 45 cents, missing Zacks’ consensus estimate of 59 cents. In addition, consolidated operating income against the year prior dropped 32.3% to $932 million, with the decline somewhat compensated due to favorable currency exchange rates. Zacks currently maintains a “sell” rating for HMC stock.

Japanese Stocks to Buy: Honda Motor Company Ltd (ADR) (HMC)
Source: Source: JYE Financial, unless otherwise indicated

Bearish interpretations by Wall Street analysts, however, are only part of the story, as investors of Nabors Industries Ltd. (NYSE:NBR) and Sprint Corp (NYSE:S) can attest. Since 2005, HMC stock has developed a long-term bullish trend channel that has been violated to the downside only once during the throes of the 2008 global financial crisis. Otherwise, the trend shows no discernible signs of a catastrophic breakdown.

Furthermore, HMC stock historically outperforms when building from prior waves of momentum. Inclusive of the recent 6.79% selloff, Honda’s average performance over the past three months is 3.9%. Based on similar technical conditions since the company’s initial public offering, HMC stock has a 75% probability that its price will hover around $36.50 by the end of July 2015, or around three bucks above the time of writing price of $33.76.

Japanese Stocks to Buy: Nissan Motor Co Ltd (ADR) (NSANY)

Contrary to the iconic Z sports car, shares of Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) lack a certain pizzazz, or sex appeal.

Of the companies listed here, NSANY stock is the only one not listed on the Big Board. It’s not from any shortcomings, Nissan just hasn’t chosen to list its ADRs on a major U.S. exchange. And it’s certainly no laggard — NSANY is up roughly 20% year-to-date. Should efforts like the redesigned flagship Maxima model translate to higher sales volume, look for NSANY to build off prior gains.

Similar to many stocks listed on the Nikkei, Nissan shares have largely built a strong support baseline since 2003. The only time technical support failed was during the global crisis nearly seven years ago. However, NSANY stock quickly rebounded from the pit and has managed to zigzag its way to where it is now.

Japanese Stocks to Buy: Nissan Motor Co Ltd (ADR) (NSANY)
Source: Source: JYE Financial, unless otherwise indicated

Given its four-week average performance of 1.41%, historical analysis of NSANY stock patterns renders an 80% probability that by the end of May, shares will be trading hands around $22.76. While the odds are extremely favorable, the projection is contingent upon whether NSANY can “beat” the bearish implications of a broadening wedge — or megaphone pattern for Harry Dent fans — that has formed since February of this year.

If the Nissan faithful can push the stock past this dark cloud, it will more than likely be clear sailing from here!

As of this writing, Josh Enomoto was long MFG, MTU and SMFG.

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