One of the best values today in currencies remains the oversold Japanese yen.
The yen has been beaten to a pulp over the last 12 months versus the euro and even the sad dollar has logged a slight gain versus the Japanese currency since October 2005. But I think the Japanese yen is hugely undervalued, supported by a growing economy, a booming auto sector and an economic renaissance since 2005 as the government cuts taxes, spurs bank lending and bank credit growth.
Japan is still trying to eradicate deflation, or a period of falling prices. From 1990 to 2004, the Japanese economy suffered its worst post-WW II recession; some periods, like 1998, might be better coined an outright depression.
I was in Tokyo back in June and I can tell you that businesses are spending briskly, consumers are finally opening their wallets and Japanese manufacturing has increasingly expanded to lower cost centers like China and other East Asian countries. The big chink in the yen's armor now is The Bank of Japan, vaccilating on interest rate hikes because they fear the economy is still too weak to absorb a 0.25% rate hike. I don't think so.
The way to play Japan is to either buy Japanese stocks, among the worst-performing bourses in 2006 following a torrid 3-year rally from 2003 to 2006, or even better, Japanese real estate investment trusts (REITs).
The way I see it, the yen is cheap. I want to own yen but I'm not looking for a lousy money-market rate of barely 0.10%. Instead, Japanese REITs yield about three times what Japanese govenment bonds currently yield and offer good intermediate-term appreication. In fact, with the economy growing again, Japanese government bonds are probably one of the worst investments for a Japanese yen investor over the next 12-18 months as yields eventually rise. But REITs are looking good as Japanese real estate values finally start appreciating again for the first time in 15 years, pay a nice yield in anotherwise low-yielding yen, and should provide dollar-based investors with a smart capital gain by 2008 as the dollar eventually declines again.
