Japan Could Continue to Outperform U.S.

In my past commentaries, I have discussed the turnaround in Japan’s economy and stock market. After languishing for nearly two decades, Japanese stocks touched a multi-decade high of 17,563.40 in early April before retrenching down to the current 14,000 level. Despite this, the benchmark Nikkei 225 is up nearly 25% 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.

 According to the Bank of Japan’s web site, “Japan’s economy continues to expand moderately, with domestic and external demand and also the corporate and household sectors well in balance. The economy is likely to expand for a sustained period. The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend.”

 At the recent Bank of Japan meeting, the central bank did as widely expected by eliminating its zero interest rate policy and increasing the country’s key interest rate from 0% to 0.25%. It was the first interest rate increase in close to six years.

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 Economic numbers just released support the country’s turnaround and justification for potentially higher interest rates down the road. Japan had been fighting deflation for years so the change in interest rate policy appears to be signaling an end to deflation and to continued economic growth.

 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 your portfolio. And unless we see an economic setback driven by the small rate increase, Japan may continue to outperform U.S markets in the foreseeable future.

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