Must-know: Is Japan’s fixed investment waking from a deep sleep?

Market Realist

Bank of Japan's Tankan points to strong recovery (Part 2 of 6)

(Continued from Part 1)

Fixed investment in Japan

The below graph reflects the flat lining of Japan’s fixed investment environment. As the Japanese yen had appreciated from 140 to the US dollar to 75 to the US dollar from 1998 to 2011, global fixed investment capital flocked to China, leaving Japan in the dust. However, as the Japanese yen has finally begun to depreciate aggressively against the US dollar and the dollar-pegged Chinese yuan, things could be changing.

Strengthening Chinese yuan takes pressure off yen

As noted in related series referenced below, the Japanese yen has depreciated roughly 30% against the US dollar and Chinese yuan since late 2012, and corporate profits have begun to grow rapidly. Plus, the slack production capacity in Japan is out of the danger zone post-2008 and headed back to the 2007 levels. Should this trend continue, you might expect to see fixed investment data, as noted above, move back to the levels seen during the 2002–2006 period of expansion, when the Nikkei stood at 18,000—roughly 30% higher than it is today.

Outlook

As 2013 progresses, investors could see a continued outperformance of Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further clarification as to why DXJ could outperform both EWJ and other Asian equity indices, please see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics.” Plus, as Japan pursues unprecedented monetary expansion and the US Fed ponders monetary tightening, Japanese equities could also outperform broad US equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), State Street Global Advisors Dow Jones Index SPDR (DIA), and Blackrock iShares S&P 500 Index (IVV).

Please see related articles on Japanese consumption and Japanese investment.

Continue to Part 3

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