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Can Japan's Bold Monetary Policy Keep Lifting the Nikkei?

By Dan Carroll - Apr 12, 2013 at 8:00PM

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The Bank of Japan's committed to serious monetary easing, but is that enough for surging Japanese stocks?

It's an exciting time across the Pacific, to say the least. Between the Bank of Japan's loose monetary policy push, to the rush of investors looking to join in the markets' gains, there's more than enough action to keep everyone on their toes. Investors have profited, however: Over the past week, Japan's Nikkei (NIKKEIINDICES: ^NI225) gained more than 2%, continuing its rise in 2013 that has seen the index eclipse most major markets worldwide and exceed the gains of all but one of the Dow's 30 stocks. What pushed the index higher this week? Stimulus -- and lots of it. Let's dig into the details.

Shinzo Abe's big gamble
Japan's experiment with aggressive monetary easing has investors rushing to get a piece of the action, but the ultimate success or failure of Shinzo Abe's plan has yet to be seen. The Nikkei has surged, and will likely continue its run, with the BoJ doubling the monetary supply, and force-feeding stimulus into the stagnant Japanese economy. That's put governments around the world on edge, from Asian-rival China, to the U.S., where the Treasury Department this week said it will pressure Japan to avoid competitively devaluing its currency to help its exports. Competitive or not, the yen's fall will still help big exporters such as carmakers and manufacturers.

Yet, risks remain. Japan's debt is still at monstrous levels, far exceeding 200% of GDP; if the stimulus works, the economy's growth will help ease the debt burden. If the economy can't advance at a meaningful growth rate, the country's debt will become a much more serious problem. Still, in the economists' battle between austerity and stimulus, Japan's pursuit of the latter policy looks a lot more promising -- especially to investors -- than the actions of austerity-plagued, stagnant Europe. The eurozone's struggles have proven that even careful attention to fiscal responsibility and a commitment to rebuilding can't save an economy in the dumps.

In the short term, stimulus is the fuel the Nikkei needs to keep pushing higher and higher. In the long term, however, Japan -- and investors -- have to hope Abe's plan works as well as advertised.

A weak yen and easy money will help exporters such as Japan's automakers, but leading car manufacturers Honda (HMC -1.23%) and Toyota (TM -0.47%) are facing problems of their own. The two are part of a massive recall by automakers due to risks posed by airbags originally made by Takata Corporation. Fortunately, neither Toyota nor Honda has reported any serious incidents stemming from airbag defects, so the recall shouldn't spark controversy. Nonetheless, it's a black mark for two companies that have dealt with more-than-enough recalls recently.

Still, these companies are well-positioned to ride the rising tide of stimulus. Toyota's stock jumped more than 5% this week alone, while Honda's surged 2.9%. Toyota has lost ground in China to rivals, and the company's facing competition in the U.S. CEO Jim Lentz predicted that the Camry, Toyota's best-selling vehicle, could lose market share in the American midsize market. However, the weaker yen will allow Toyota and Honda to price their cars more competitively, potentially undercutting the advances made by competitors. As long as stimulus keeps flowing, Toyota, Honda, and other Japanese automakers will benefit.

The same can't be said for struggling Japanese companies, such as Panasonic (PCRFY 0.78%). While this stock gained a whopping 9.5% this week, Panasonic's still facing overwhelming competition from electronics makers such a Samsung. The company fought off rumors surrounding the end of its plasma TV business on Friday, claiming that it "intend[s] to continue to research ways to take our Plasma technology to even higher levels," despite its lagging electronics business. That likely won't be enough to keep rivals at bay, however. Japan's bold monetary policy can't help a company on such shaky footing as Panasonic and, unless this firm announces a major new move, it's the last place investors looking to share in Japan's rise should look.

Shinzo Abe's aggressive vision has kicked Japan's stimulus into high gear; but, as always, only the best companies across the Pacific deserve your investment.

Will stimulus send Toyota higher?

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Stocks Mentioned

Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
TM
$160.60 (-0.47%) $0.75
Honda Motor Co., Ltd. Stock Quote
Honda Motor Co., Ltd.
HMC
$24.95 (-1.23%) $0.31
Panasonic Corporation Stock Quote
Panasonic Corporation
PCRFY
$9.09 (0.78%) $0.07

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