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Japan's been an investor's dream this year, there's been no doubt about that. With the Nikkei (NIKKEIINDICES: ^NI225 ) index up more than 38% year to date, far ahead of even strong gains out of the U.S., it's impossible to call it anything else. The Nikkei added another 4% to its gains this week in a strong showing over the past five days.
As much as the stock market has lifted due to Japan's recovering economy, it's the growth of Japan's leading companies overseas -- growth helped by the success of Tokyo's stimulus and weakening of the yen against the dollar and other major currencies -- that has helped top firms and stocks rise up the charts.
Exports have taken off in Japan this year as companies have looked to use the falling yen to boost their bottom lines. Currency fluctuations have an affect on every company that engages in international business, but Japan's currency devaluation has made it better than ever for firms to spread out across the world. Economists polled by Reuters expect that Japanese exports picked up by 14.5% in August, the biggest single-month jump in three years.
However, Japan's trade gap isn't expected to close due to an even more drastic rise in imports. For Japan's economy and government -- one that's struggling to get a handle on debt -- a larger trade gap isn't going to help clamp down on the budget.
It's where Japan's trading, too, that highlights the turn of events in this country for investors. Multinational firms across the world have flocked to China in recent years as the world's second-largest economy has risen in the global ranks, but Beijing's territorial scuffle with Tokyo has pushed Japanese firms elsewhere.
Automakers, in particular, have been hurt by the China-Japan war of words in recent months, as popular demand against Japanese firms has hit with a backlash against Toyota (NYSE: TM ) and other leading Japanese carmakers. The company's sales in the country fell by nearly 5% last year as American and European rivals surpassed it in market share, and while Toyota's improved somewhat in 2013, it doesn't expect a complete recovery in China until the fall.
Compare that to how well Toyota's performed elsewhere: Toyota's American sales skyrocketed by 23% year over year in August, with the well-known Camry model of sedan growing sales by 22% for the month. It was Toyota's best month in five years, and it highlights how well the falling yen, and Japan's improved business environment, have helped the company compete overseas. It may not be working in China, but Toyota's found other routes for growth -- routes that have helped the stock hit year-to-date gains of around 36%. If Toyota keeps up with that push in America, don't expect this stock to give back those gains soon.
Toyota and other Japanese manufacturers have also cut back on production in China due to rising labor costs, and moving on to cheaper nations and regions, such as Southeast Asia, has become the go-to move for the country's producers. Yet, even service sectors, such as finance, are extending Japan's reach into Southeast Asia, targeting a region often overlooked by investors that's nonetheless primed for growth.
Japan's government has offered incentives for investment in Southeast Asia, and the country's big banks have been all too happy to play along. Japan's largest bank, Mitsubishi UFJ (NYSE: MTU ) , announced the purchase of Thailand's Bank of Ayudhya in July for more than $5 billion. The Thai economy is expected to grow 3.8% this year, a downbeat forecast lowered from earlier rates, but still higher than many advanced economies. For Mitsubishi, it's a buy worth taking on -- an economy projected to be a big player in Southeast Asia in the future.
Fellow Japanese bank Sumitomo Mitsui Financial Group (NYSE: SMFG ) bought 40% of Indonesian bank BTPN earlier in the year for $1.5 billion, a stake that gives it an interest in the world's fourth-largest country by population, and one of the globe's rising star economies. Sumitomo's stock has gained nearly 30% year to date, but expanding into a hot emerging market like Indonesia, with momentum in its sails, is a smart long-term move by this Japanese banking leader.
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