Moody’s downgrade of Japanese debt Wednesday was bad news for the country, but it could present a stock buying opportunity, according to Adam Patti, CEO of IndexIQ.

Japanese equities are well-positioned because corporate fundamentals remain intact despite the rising sovereign debt that spurred Moody’s downgrade, he says.

“Everyone knows Japan is buried in debt,” Patti said. “But the play is there on the equity side.” Moody’s lowered Japan’s credit rating one degree, to Aa3, citing the country’s budget deficits, enormous debt and the challenges the government faces in reducing that debt. The downgrade was not unexpected, and the Nikkei index fell just 1% for the day.

The more interesting story is that Japan’s economy is recovering faster than analysts expected, Patti said. “The big question mark was how long it would take them to get their supply chain intact,” he said. “They’ve done quite an exceptional job doing that.”

Mid-cap stocks are the best way to play the recovery, because they’re in the lucrative business of rebuilding the country following its earthquake, tsunami and nuclear crisis, according to Patti.

Japanese mid-cap equities should benefit even more than large-caps because they have more “home country” exposure; large-caps such as Toyota and Sony are multinationals that often are impacted more by other countries' economies, Patti added.

Be on the lookout for any decline in Japanese equities as a result of the downgrade, he advises.

Japan’s severe debt load is due to a long-stagnant economy and to spending on pensions and social services for the country’s aging population. The country’s debt was projected to increase to nearly 220% of its gross domestic product by 2010, even before its string of disasters earlier in the year, according to the Organization for Economic Cooperation and Development.

Moody’s indicated that frequent changes in the country’s leadership were hampering long-term fiscal reform and that the disasters had hurt as well.



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