Japan's export growth: Will General Motors' loss be Japan’s gain? (Part 7 of 9)
Weak, but positive recovery
The below graph provides a clearer picture of the import and export dynamics of the Japanese economy. By using the year 2010 as a base year and adjusting for inflation/deflation, the above graph provides a view of how exports and imports have changed on a “real” basis, as opposed to a “nominal” basis. Viewing import and export growth on a real basis accounts for inflation and/or deflation, which are affected by changes in the currency and other economic factors. This article considers the recent, though small recovery of the Japan export data since Abenomics economic policies went into effect in early 2012. With a weakening yen in Japan, and potential recall costs at GM in the U.S., it might appear that Japanese automakers are in an improving profit growth position.
Real imports up 15%, real exports unchanged since 2010
The above graph of real exports and imports provides even greater contrast to the export/import changes as shown in the graph in Part 4 of this series. The difference between real and nominal growth reflect the effect of the weakening yen post-2013. Export growth in dollar terms is growing more slowly than in yen terms, suggesting that the large majority in recent export growth has been driven by the weaker Japanese yen, and not by a real growth in the actual volume of exports.
As the above graph reflects, on a real basis, Japanese exports appear to be growing more slowly than on a nominal basis since 2010, and are lagging import growth by a growing margin. Real exports appear to be a little slow out of the gate in the current business cycle, although should the pattern of real exports outperforming real imports repeat itself with the same ferocity as the prior business cycle from 2002-2008, Japan may very well awaken from its economic slumber.
Outlook for imports
Going forward, it might appear that Japan could be a larger importer than exporter for some time, although we are too early in the current business cycle, as well as Abenomics-led reforms, to tell if this trend will persist for many years, should the yen also weaken for many years. At least on a nominal basis, as illustrated in Part 4 in this series, this would appear to be a very new and important development. As discussed in the above graph, it would appear that on a real basis as well, the post-2012 Abenomics policies are reflecting real improvement in exports growth. These initiatives bode well for Japanese automakers, though significant uncertainty surrounds the inter-temporal effects of Abenomic-led reform.
To see how Japanese equities have significantly outperformed Chinese and Korean equities, read Part 8 of this series.
Japan’s equity outlook
As 2014 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). Plus, as Japan pursues unprecedented monetary expansion, and the U.S. Fed tapers its bond purchases, Japanese equities could also outperform the broad U.S. 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).
For more on how the U.S. Fed’s recent announcements can impact global equities, read Will the Fed take a bite out of Apple.
For more detailed analysis of the overall Japanese economy, read Bank of Japan Tankan supports a 2014 equity rally in Japan.
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