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Investing in Japan's Economy

Written By Brian Hicks

Posted February 18, 2008

If old Uncle Sam and his "knowledge-based economy" top all developed countries, and China is rising like a fierce dragon through low-cost manufacturing growth, where does that leave Japan’s economy?

Number 2 in the world, to be specific.

From Prius to Playstation, Japan plays smart.

High technology and Heavy Industry Balance Japan’s economy

Japan makes things the world needs…and will pay top-dollar for!

Since the mid-1980s, the economy has gone from astonishing heights to devastating depths, but those industries have kept chugging along.

Tokyo’s key stock market index, the Nikkei 225, suffered a devastating and drawn-out downturn from 1990 to 2003. As the Nikkei plummeted from a high around 40,000 to a bottom of just over 7600, the Bank of Japan (Japan’s central bank) tried to keep money flowing by dropping interest rates to 0%.

Nikkei long-term chart

That’s right–0%!!! You think the Fed has gone low? Try dipping past Japan!

Today’s BoJ benchmark rate stands at 0.5%, and last week official statistics on 2007 economic growth surpassed experts’ predictions by coming in at 3.7% for the fourth quarter.

Compare that to a paltry 0.6% U.S. economic growth in the same period!

Last Friday, Bank of Japan Governor Toshihiko Fukui refused to wildly lower rates like the flailing Fed, saying that a domestic recovery seemed set to continue, even if a U.S. slowdown spread around the world. The BoJ also did not raise rates, showing that inflation and a worldwide downturn balance each other out in Fukui’s mind.

Japan’s Economic Recovery to Continue

In Monday’s Tokyo market action, we saw three major trends play out:

  • Steel stocks like JFE Holdings gained on worldwide commodity demand.
  • Toshiba pulled the plug on its HD-DVD technology, spurring Toshiba stock (OTCBB:TOSBF) up by 6% as fear of a spending war with Sony’s Blu-Ray subsided (either way, a Japanese company wins).
  • Sub-prime related losses at Aioi Insurance Co. are expected to reach 80 billion yen, sending that company’s shares down by 6.8%.

So in Japan the international battle–between commodity and consumer bulls on one side, and credit-crunch bears on the other–is in a dead heat, but the iShares MSCI Japan Index ETF (NYSE:EWJ) has bounced harder off recent lows than the Dow has, showing superior potential in the coming months.

What’s more, 2007 figures show that Japan’s top automaker, Toyota, is now neck-and-neck with GM in China and the rest of the developing world, where the Japanese had been lagging. That’s another niche where Japanese industry is going to hedge against U.S. domestic downturn, continuing the trend up and away from the Dow.

By the way, we’ve already tapped huge international returns from Japan and elsewhere in Orbus Investor, and with my new service, Global Growth Stocks. You’ll learn more about GGS soon, so stay tuned.


Sam Hopkins