Continued Recovery in Japan

In my past commentaries, I have discussed the turnaround in Japan’s economy and stock market. After languishing for nearly two decades, Japanese stocks are again trending higher and have a positive bias. The benchmark Nikkei 225 is up nearly 50% from its 52-week low and has rewarded patient investors who might have been holding Japanese stocks, ETFs, or index funds.

 The Bank of Japan has eliminated its zero interest rate policy and has adopted a positive bias towards higher interest rates down the road. At the same time, the central bank wants to make sure higher rates do not impact the economic renewal that is underway in the country.

 Economic numbers just release support the country’s turnaround and justification for potentially higher interest rates down the road.

 Japanese consumers are clearly more optimistic now than in the past 16 years. The country’s April consumer confidence reading came in at 50.0, up from 47.9 in March. A reading of 50 or over indicates positive sentiment. It was the highest reading since June of 1990.

 Driving the renewed optimism has been an improving labor market and wages, along with a rise in wealth driven by the upward trend in stocks. Japanese consumers are feeling more confident about their economic situation and this could translate into increased spending. This, in turn, could fuel corporate expansion and spending and add fuel to the economic engine.

 The current signs point to continued recovery in Japan. For the investor in North America, it means you need to have some capital in Japan and diversify out of domestic stocks. Unless we see an economic setback, Japan may continue to outperform U.S markets.

 If you are looking to play Japan, there are numerous Japan- oriented mutual funds or ETFs. Some more aggressive investors may look at Japanese American Depository Receipts (ADRs) listed in U.S. exchanges.