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Japan's Nikkei (NIKKEIINDICES: ^NI225 ) had a hot week behind Washington's attempts to resolve the government standoff and debt ceiling raise fight, as the world's third-largest economy's prominent stock index jumped more than 2.5% over the past five days. That added to the index's already blistering 2013, as the Nikkei's soared more than 32% year to date even after tapering off somewhat in the second half of the year so far.
Still, some doubt how far Japan's economy can fly this year as Prime Minister Shinzo Abe's stimulus has jump-started a long-dormant market. Automakers such as Toyota (NYSE: TM ) and Honda (NYSE: HMC ) have welcomed the yen's fall alongside the stimulus, but can Japan's economy continue to drive stocks higher after the Nikkei's already-astronomical gains?
Japan turns toward higher growth
The Bank of Japan has hit a problem with the U.S. government shutdown. The central bank has bought up domestic government bonds in an attempt to push Japanese investors into riskier investments, but many such investors have turned to U.S. government bonds this year. With Washington at an impasse, investment inflows have spiked as Japanese citizens sold more than $22 billion worth of foreign bonds, according to The Wall Street Journal.
That might frustrate the Bank of Japan, but it's not slowing Abe down from his plans for Japan's economy. Abe's turned toward sustaining economic growth after the country's economy jumped by more than 3% in the most recent quarter. Abe wants companies to invest more, and he's planning on launching a series of tax breaks to incentive that even as Tokyo debates a sales tax hike to get a handle on mounting public debt. Taxes would go a long way to helping out automakers among all Japanese firms, as domestic carmakers like Toyota have long faced substantial taxes in their home market.
So far, the country's manufacturing sector has liked what it's seen in 2013. Machinery orders, excluding ships and power generation, jumped more than 5% in August, a sign that Credit Suisse says points to more of the capital investment Abe desires. While Japanese inflation has a long way to go before it reaches Tokyo's goals, a growing manufacturing sector and increasing capital spending is a strong step toward a stronger investor foundation in the country.
That, and the weaker yen, have been a boon for Toyota this year, and Japan's leading car manufacturer even has received a boost from an unlikely source recently: China. Toyota, whose stock has leaped more than 36% year to date and grew its deliveries to the world's hottest auto market by 63% in September. That's a big improvement compared to Toyota's recent pitfalls in China, as the Senkaku Island dispute between Tokyo and Beijing has led to plummeting sales for Japan's major automakers in the country.
It wasn't the only auto leader making the most of the weak yen by growing China deliveries, however. Honda grew deliveries to the country to their highest mark in more than a year. Nissan (NASDAQOTH: NSANY ) grew sales in the country by more than 83% for the month, outselling Ford in China in September even though Nissan only recorded 2% sales growth through the year's first nine months overall.
Tokyo and Beijing's hackles are still raised, but it seems China's appetite for car buying is overcoming nationalist sentiment against Toyota, Honda, Nissan, and other Japanese automakers. If these companies can reestablish their presence in the world's largest car market and compete against American and European rivals that have made up ground in China, they'll be well positioned to capitalize on the weak yen and impress investors in coming quarters.
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