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Global Macro: A Closer Look at Japan's Economy

Andrew Sachais

NEW YORK (TheStreet) -- The Japanese stock market recently has enjoyed a rise similar to that seen in U.S. equities.

The chart below highlights just how significant the increase has been. The chart pairs the MAXIS Nikkei 225 Index ETF over Total World Stock Index ETF .

The price appreciation has been nothing short of exponential. Since Prime Minister Shinzo Abe implemented his sweeping reform of both monetary and fiscal policy, markets have taken off.

Equity has been the in-demand asset class for investors across the world as of late, and it doesn't look as if this trend will be letting up anytime soon.

The weakening yen and increased consumer confidence in Japan are helping the rally. Although inflation data are far from the desired 2%, Japanese stocks are likely to see further moves higher.

The next chart highlights the economic validation for the exponential rise in the Japanese Nikkei index. The weakening yen has allowed the export-driven Japanese economy to gain a competitive advantage over other countries.

South Korea and Australia have said the weakening yen is having tangible effects on their economies, but in recent world conferences, global leaders have looked favorably upon Abe's policy. As long as the yen remains weak against the U.S. and Australian dollars, exports should continue to grow.

The increases in Japanese stocks and corporate profits have driven consumer confidence higher in Japan.

The wealth effect has played a role in both consumer spending and consumer confidence. In the charts below it is apparent that the new expansionary monetary and fiscal policies have led to real gains in the economy.

As the consumer goes out to spend and confidence increases, riskier assets will continue to dominate the Japanese market.

Although Japan's economy remains vulnerable to a global downturn, the positive aspects of the recovery still outweigh the negative.

A recent large outflow of funds from Japanese Treasuries into foreign debt has alarmed some market watchers. They believe that rates may be moving too rapidly and will lead to a crushing interest rate on future Japanese government debt.

The fear is again valid, but the outflow hasn't been nearly dramatic enough to warrant a winding down of the current policy. The fact that easy money across the world is pushing money into equities and the Japanese market remains one of the most attractive economies should result in continued gains for the Nikkei index.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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