Japan: The Forgotten Asian Market

Over the past year, investors have had plenty to distract them from actual market news. You have the ongoing trade disputes between the U.S. and China, the U.S. and the European Union, and the U.S. and its NAFTA partners. There have also been meetings between the U.S. and North Korea and between North Korea and South Korea. There is the ongoing issue of England’s exit from the European Union.

All of these issues have served as distractions from actual market performance. While all of this has been going on, Japan has quietly remained in the background. And something tells me that that is exactly how many Japanese companies and investors like it.

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In the meantime, Japan has continued to grow its economy under Prime Minister Abe. Abe was just re-elected as ruling party leader and that means he could remain as Prime Minister until 2021.

Under Abe, Japan has seen corporate profits grow to their best levels in decades. A weaker Yen has helped increase exports while also increasing tourism and improved the labor market. The unemployment rate in Japan is under 2.5% for the first time since the early 90’s.

The Bank of Japan has maintained its easing policy and that has helped exports which have been steadily growing since the end of the global financial crisis in 2009. What is really interesting is how exports to China have grown in recent years. Japan used to heavily reliant on the United States for its exports, but that isn’t as much the case anymore. The U.S. is still the biggest trade partner for Japan with approximately 21% of exports, but China is now the destination for 20% of Japan’s exports.

Despite the growing economy, Japan’s stock market has received very little attention over the past year. In fact, I bet very few people could tell you that among the major global indices, the Nikkei is up the most over the past year.

That’s right, the Nikkei is up more than the S&P 500 over the past year with a gain of 16.7%. Sure the S&P is up 16%, but we all know that because our President never misses the chance to crow about how well the market is doing. India’s Bombay Sensex index is up 14.6% to join the S&P and Nikkei as the best performing indices over the last year.

The Shanghai Composite is the worst performing index with a loss of 18.7%. Of course, China has been at the forefront of the trade disputes and that has taken a toll on Chinese stocks. China has also seen its economy grow at a slower pace in recent quarters and that has certainly played a role as well.

If you look at the middle group of indices, that is where you will find the German DAX, the French CAC, Hong Kong’s Hang Seng index, and South Korea’s Seoul Composite index. All four of those indices have struggled to gain ground over the past year. The various disputes have kept their respective economies from growing or have kept corporate profits from growing.

While most analysts, including me, have been focused on Chinese stocks and their impressive earnings and sales growth, Japanese stocks have been providing a better return overall. Sometimes quiet movement is better.

If you are looking for investment exposure to the Far East, but are concerned about the ongoing disputes between the various countries, Japan just may be the best place to invest with the least amount of risk. As long as the BOJ is accommodative and Abe continues to push his agenda successfully, I don’t see any reason that Japan’s growth trajectory should change.

If you would like to add an investment to your portfolio that will give you diversification and exposure to the Japanese market, the iShares MSCI Japan ETF (NYSE: EWJ) will accomplish both of those tasks.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.