From Japan: The Best Ideas for 2009   

• This could be Japan’s worst recession since the Showa Depression in the 1920s, or a mildly positive surprise for stocks in 2009.  One Japanese equity strategist even offered two scenarios on a recent popular business TV program i.e., a surprise recovery, or renewed market lows, depending on which set of assumptions you use in your scenario. 
• Our suspicion is that, given the freefall in the global automobile market, a surging yen and political grid-lock, Japan’s economy may not recover in 2009. However, we do see room for a first-half "economic stimulus" rally, given the huge stimulus packages in the US, China and other major economies that are coming down the pipeline.
• These packages are unlikely to be a panacea for one of the worst synchronized global recessions in our lifetimes, but the Japanese Heisei Malaise experience suggests they could produce at least a temporary bounce in economic activity.
• There are also high expectations among the still-surviving investment bankers in Tokyo of renewed M&A activity by Japanese companies with high cash reserves desperately seeking growth opportunities, mainly overseas. While the post-merger performance track record of Japanese companies is not good, some of them are learning to do it well?especially those that take many small "bites" instead of one big gulp.
• As we mentioned last week, any positive change in Japan is likely to come despite the current political gridlock. While opposition politicians are demanding and outside observers are hoping for an early dissolution of Japan's Diet for lower house elections, it is more likely that the current Aso Administration will hold on to power until the final moments, i.e., until current terms expire in September.
• For the time being, we see selective rallies domestic niche demand stocks that are benefitting from the retrenchment of consumer expenditures. In autos, electronics and basic industries, 2009 could be a year of renewed consolidation and "survival" M&A activity. In other words, we don't see not enough investment potential to overweight Japan, but there are opportunities for avid stock pickers to gain some alpha.

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