Could It Happen Here?

If you think you have it bad in the U.S. stock markets, just be glad you don’t live in Japan. It may be true that the Japanese build much better cars and electronic devices than Americans, but take a closer look. The Nikkei 225 (the largest 225 companies listed on the Nikkei based on market-cap) is in a 21- year drought! Trading at around 11,014 on Wednesday, the index is basically where it was 21 years ago on May 1, 1984. Can you imagine this utterly frightening scenario? Zero growth!

 Japanese investors in index funds have seen their investment assets dwindle over the past 21 years, when you factor in inflation. Luckily, inflationary pressure in the country has been benign.

 If I were an investor in Japan, I would really be in a nasty mood. Stocks are stagnant. In the 10-year period from 1990 to 2000, the Nikkei 225, after peaking at around 40,000 in early 1990, moved in a downward trend, while major U.S. indices, such as the DOW, NASDAQ, and S&P 500, trended higher. Since 2000, the Nikkei 225 has traced the movement of the U.S. indices.

 Japan has gone through multiple recessions. The concept of “guaranteed lifetime jobs” has faded away, and Japanese workers now find themselves in the unemployment lines.

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 But, while the Japanese economy remains in a pickle, there are some positive trends that indicate the turnaround remains in motion. GDP growth was upgraded to over 1.5% in 2005, according to the International Monetary Fund, up from a 0.8% forecast in April.

 The economic trend in Japan is improving, and this may bring more prosperous times ahead for Japanese investors who have suffered enough. The only saving grace has been the ability of the Japanese to hoard their cash and save, unlike the debt-ridden consumers in the United States. As interest rates rise, the Japanese are more immune to the impact of higher financing charges. But, here in the United States, where the savings trend is negative, rising interest rates could spell a lot of trouble, jeopardizing an economic recovery. Learn a lesson from the Japanese, save and then save some more!

 Japan is also seeing a positive trend in its labor market, along with corporate and bank restructuring designed to help the fragile Japanese banking infrastructure.

 But, before Japan can surface from its 21-year drought, it will need to overcome more hurdles. Activity in Japan’s service sector declined for the second straight month in March.

 And there is another fear for Japanese companies. The weakness of the Greenback against the Yen is having a noticeable impact on Japan’s crucial export sector, which has helped drive the economic recovery. Here in the U.S., the Treasury wants you to believe a soft Greenback is undesirable, but don’t believe a word of it. The reality is that the country is facing a massive and growing trade deficit and wants to reduce this. Also, as demonstrated by what has happened in Japan, a weaker Greenback will help the export sector here and, at the end of the day, help to increase the demand for U.S. goods and services. If you are told otherwise, don’t believe it, it’s fiction!