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Sometimes in life it can seem like when something has been a certain way for a very long time that it will always be that way. It’s like the brain has a tendency to get conditioned to a situation and decides it will always be that way.

Well, investors get the same way about a stock or index that’s been out of favor for a long time. They can never seem to imagine a day when it will come back.

Take, for instance, Japan’s Nikkei index. It’s been down for over two years in a row, even as most other stock indices have rebounded.

But actually, you can look further back to the larger trend and see that Japan’s Nikkei was one of the first indexes to top out. The Nikkei topped out in early 2006, while most other stock indexes topped out at the end of 2007 or early 2008.

So, the Nikkei has really been trading lower for about six-and-a-half years. Well, you can see where it would be easy to get sucked into the thinking that those stocks are never coming back. However, it’s simply not true.

There are a couple of things changing that are going to set up the Nikkei for its first real rally in years.

A Change in Direction for the Yen

The first thing is the change in the yen. You see, the Japanese yen has been strengthening in a big way ever since July of 2007, and it finally peaked in October of 2011 but traded somewhat sideways through January of this year.

From that point, the yen has begun to descend. In fact, let’s take a look at the Nikkei in the weekly, three-year chart below with the Japanese yen plotted below it.

2012: The First Down Year for the Yen in Years

See larger image

Why is the fall of the yen important? Japan’s Nikkei is filled with major exporters such as Toyota, Honda, Mazda and Sony.

From the viewpoint of an exporter, you want a cheap currency. If your goods appear to be cheaper because a foreigner’s money goes further, then they are more apt to buy more of your products.

However, if your currency is stronger, your products will appear more expensive to foreigners and you’ll sell fewer. So what the currency is doing is a big deal. It’s one of the determinants of how well these companies will do.

In other words, when dealing with a strong yen, they have the wind in their faces, and when they have a falling yen, these companies finally get the wind to their backs.

If you’ve ever ridden a bicycle in the wind, then you know it makes a big difference whether the wind is with you or against you.

It’s the same with these companies. With absolutely no other changes, their performance and results will vary widely depending upon the value of the yen.

What Stimulus Means for the Yen

The other thing that has changed in the favor of the Nikkei is that Japan has instituted an “asset purchase program.” A pretty sizable one at that … to the tune of 80 trillion yen. Then, on Friday, Japan announced 750 billion yen ($9.4 billion) of stimulus to boost growth. The measure was undertaken after bond dealers’ concerns over government spending raised fears of a disruption at a December debt sale.

This will be good for Japan’s stocks for now and bad for its currency.

So between the stimulus programs and the change in the direction of the yen, Japanese stocks have a chance to reverse course for the first time in over six years.

With that in mind, let’s look at an ETF that tracks Japanese stocks. It’s called the Wisdom Tree Japan Total Dividend ETF (DXJ). Let’s check out its daily, two-year chart below.

Declines in the Yen Can Be the Catalyst for Huge Moves in Japanese ETFs

See larger image

Going into 2012, the yen took a tumble and Japanese stocks got their first good shot in the arm they’ve had in a long time.

Now, the yen is beginning to fall off the map again and DXJ is breaking out of its triangular coiling consolidation.

I believe this sets up DXJ to where it could head to $36 per share or higher over the next two to three months. This means the stock could move a whopping 11% within that very short time if the yen keeps falling as I believe it will.

So check out DXJ. I believe it’s primed for its next launch higher and it’s going to catch the masses off guard. They’re going to wonder where this rally came from. But you’ll know that it’s come from the new stimulus and from the change in the direction of the yen.

Have a nice day!

Sean Hyman
Editor, Currency Cross Trader

P.S. As I said, just because a situation has been one way for a while doesn’t mean it has to stay that way. The Fed’s policies are killing traditional income opportunities right now, but that doesn’t mean there aren’t ways to find it. My colleague, Evaldo Albuquerque, is doing just that in his new Pure Income service. Right now, he’s looking at a new breed of stocks he calls “Ultra Dividends.” To learn more about his research, click here for a special video report.


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