Is Japan's Surging Stock Market Hiding a Dangerous Risk?

Japan's been the growth story of the year. The country's new stimulus measures have turned around two decades of stagnancy, and fueled the Nikkei (NIKKEIINDICES: ^NI225  ) stock index to gains of more than 31% year to date. The Nikkei picked up another 4% this week as investors have rejoiced about the direction of Japan's markets. But can this surging growth story keep it up? Let's check out the latest from across the Pacific.

Dangers in the rise
Japan's GDP has picked up sharply this year, but the country has cautioned that the strong gains that investors have come to expect might not pan out for the next few years. Tokyo's forecast estimates that Japan's economy will pick up by just 1% in the 2014/2015 fiscal year, far below the 2.8% growth the government expects from the current year.

The IMF's gotten in on the act, as well, with a new round of warnings to economists and investors. The agency has cautioned that Japan's stimulus-fueled recovery could inflict severe damage to the global economic bounce back from the 2008 recession should prime minister Shinzo Abe's measures fail. Like with China's slowdown that has dominated headlines, an economic slump would hit Japanese firms, which are relying on strong growth, hard.

More importantly, if the yen fails to keep up its weakening against major currencies, particularly the dollar, Japan's top exporters will face trouble. Firms like construction and manufacturing giant Komatsu (NASDAQOTH: KMTUY  ) are counting on the weak yen to boost its bottom lines from overseas sales. Komatsu rules the Chinese manufacturing market's top spot, and although the Chinese market's slowdown has hurt Komatsu's outlook, a weak yen still makes the company's forecast look optimistic. A failure on that end would be a big blow to both the company and investors looking to take advantage of Japan's surge.

For now, however, the Japanese economy's boost is lifting the results from the country's top companies. Sony (NYSE: SNE  ) reported earnings this week, and the firm finally brought its electronics division's bottom line back to profitability in the most recent quarter. Sony's stock shot up sharply on the news that its electronics division, including sales from smartphones, televisions, and other products, did well. Sony's counting on those sales to help push into a growing future that capitalizes on the mobile revolution and other technological pushes. What happens to Sony's entertainment division now becomes the big news for investors: Many analysts have pushed for the firm to spin off the branch to unlock shareholder value, although others think the possibility is still remote.

Sony's rival in the gaming space, Nintendo (NASDAQOTH: NTDOY  ) , is an example of how weaker firms aren't able to capitalize as successfully from the Japanese economy's gains. Despite the weak yen, Nintendo's results have come in poorly, as the company has struggled to sell its next-gen Wii U game system. Nintendo still turned a profit for its most recent quarter -- and shares are up more than 22% year to date – but this company's heavily reliant on the weak currency to boost its struggling business. As Sony and Microsoft (NASDAQ: MSFT  ) prepare to release next-generation game systems themselves this holiday season, Nintendo has to ramp up sales fast – or risk being left behind in the battle for next-gen preeminence.

Japan's market has exploded this year, and the Nikkei's ranked among the best-performing stock indices in the world. But Japan's success might be just the beginning of a worldwide trend: Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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  • Report this Comment On August 02, 2013, at 11:59 PM, grahamsway wrote:

    Great topic and one that probably needs to be discussed every once in a while.

    I'd guess just about every astute investor, in the real sense of the word investor, understands that Japan is just the latest and most blatant example of the "musical chairs" policies being undertaken by central banks.

    As the CB's try to keep the music going with excessive PR and QE's and as the increasingly short-term driven markets enjoy the dance, an increasing number of those involved are dreading the scramble for seats when the music stops.

    What's really interesting is the consternation whether US tapering begins in Sept or Dec when the expectation of what's likely when there is no QE (forget about unwinding what's been purchased) is probably a more salient concern.

    Unfortunately, in the end, "Dangerous Risk" might've been a significant understatement.

  • Report this Comment On August 03, 2013, at 4:34 AM, NobunagaOda wrote:

    nah japan will be strong. im just angry that i didnt have the guts to buy sony.. damn that would have been a monster pay off

  • Report this Comment On August 04, 2013, at 6:35 PM, chinabeach wrote:

    WORLD WAR Z: SONY VS THIRD POINT

    HOLLYWOOD (RNA)--Aside from being about finance and which studios-films profit, one need only examine the box office list of all time gross films to reflect on the nature of the industry itself. Full of comic book heroes, animated avatars, witch hunters and dinosaur parks; only three qualify for serious films, "Forrest Gump" (1994) which placed #28; "Saving Private Ryan" (1998) at #114; and "Apollo 13" (1995) which placed #187. This excludes the recent release "Lincoln".

    What do these three outstanding real-life films have in common? Tom Hanks was in every one of them.

    It seems fitting that a hedge fund manager should be making negative comments on how an industry is run; someone who himself is in a world of high risk and depending on comic book heroes to make a buck.

    Just what actually does Third Point expect to do to bring up individual film gross and not just put money into stock? Will serious reality-related films become more frequent and make more money? Doubtful. The public will one day lose its taste for all of the fantasy related hogwash currently fueling the bottom line of film production and Third Point will find new meaning in the phrase "hedge fund."

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