Japan – East West Markets

Australian Partnership: East or West?

Australia has to decide whether it will go west (with France or Germany) or east (with Japan) vis-à-vis its choice of partner for the next generation of submarines. This project is set to be Australia’s “biggest ever defense procurement programme.”

While all three countries have quite the resume for this position, what will ultimately decide which direction Australia chooses will be the following issues: capability, cost, risk and schedule. In addition, the way that these countries’ systems and software applications collaborate with America – Australia’s alliance partner – will be an additional major consideration.

It could well be that ultimately Australia will decide to go the eastern route. Just last month during its talks with Japan, the military discussed potential design and production issues of the submarines, possibly narrowing down its choice. But nothing is yet set in stone. Proposals are still being welcome from all three countries. And, no matter which country is chosen, much work will still take place in Australia.

One reason China and Russia are not being considered (despite the fact that they are experts in this field) is because Australia does not generally work with these countries in military matters.

Ultimately, price will probably be one of the key determining factors as to which route Australia will ultimately take on this project.

Economic Growth: Japan and America

Japan could be slipping back into a recession. Thankfully, this is unlikely to have a negative effect on America’s economy but internationally, concern is expected to increase. The reason America is less likely to be impacted is two-fold: a mere 4.1 percent of American exports go to Japan and the falling value of the yen vis-à-vis the dollar which results in cheaper Japanese imports in America. Experts predict at most, a decline of around a tenth of a percentage point.

The regions that could be negatively affected however is Europe and China; areas that are already dealing with the challenges of slow economic growth.

Japan’s disappointing performance may be connected to the escalation in its sales tax. This was somewhat substantial – an increase of 5 to 8 percent. While it did help in reducing the overwhelmingly large budget deficit, it simultaneously had the negative impact of making consumer spending less appealing. Clearly, the economy just wasn’t up to this kind of move.

Shinzo Abe, Japan’s Prime Minister last year put money into the fiscal system, lowering interest rates through bond purchases last year. At that time, the region encountered a peak, following a stagnation of over two decades. But now, growth in the economy has weakened to around 1.5 percent.

Perhaps Abe needs to do a bit of what he did a year ago to get the region back on track.

Current Economic Review: Japan and UK

Recent statistical analysis has indicated that Japan’s economy is weakening. July 2014 figures showed a drop in household expenditure while factory output and inflation remained status quo. However, some analysts said ‘real’ inflation actually dropped due to the actual figure when looking at the increase in sales tax a few months ago.

Moving over to the west, the UK is currently encountering a modest economic recovery. From May there was some improvement with the country’s GDP increasing 0.6 percent from June through August. As well, industrial output did better than expected in July. However, the UK is not doing great vis-à-vis its trade deficit. This issue can affect its global business and have an impact on Japanese investments.

What else may in the near future impact the UK’s economy is if the UK breaks away from Scotland. According to Mizuho Corporate Bank’s market economist, Vishnu Varathan:

“If you get any fluctuation in gilt yields, that will have a knock-on effect on yields across the global markets. Also many Asian investors have exposure to UK and Scottish-based financial institutions from asset managers to banks to insurers, while these institutions also hold Asian assets, so they may divest to cover positions too. If the fiscal burden for what remains of the UK goes a lot higher, that could push yields up as markets would expect more bond supply to come on to the market because of the higher debt obligations vis-à-vis the augmented GDP (gross domestic product) of the UK. Durable impact will be difficult to pin down until we get further clarity, but in the meantime the uncertainty will play out as sterling weakness and weaker markets in Asia as well, so we could see equities coming off and bond yields coming off.”

Both the Japanese and UK economies are recovering nicely and faring quite well (with a few issues here and there). But the economic forecast for the two is uncertain right now, especially with the potential of Scotland becoming independent from the UK. Only time will tell if that happens and, the impact on foreign investments it will have.

Japan, UK, Economy: A Comparative Look

From the 1960s to the 1980s, Japan’s economy was strong. Today, this is not the case. Looking at Japan’s economy in 2013, one can compare it negatively to the UK’s. As economist James Carrick pointed out, today there is a mounting fear that Japan’s 2008 financial crisis will not be that dissimilar to the “prolonged period of poor or non-existent growth in the UK.”

Ben Chu, Economics editor of ‘The Independent,’ questioned whether there would ever be a full economic recovery in the UK, especially given the Bank of England’s prediction of continued stagnancy. Vis-à-vis Japan, UK, economy, Richard Koo noted the parallels between the two. An economist at the Nomura Institute, Tokyo, he said that particularly after the bubble burst in Japan, its central bank “sought to contain the destructive forces of deflation through quantitative easing.” But this didn’t help the money supply or boost bank lending.

Carrick concludes though that there is a strong sense that the UK will not encounter “a Japanese-style slowdown.” He feels that the UK is actually stronger and more dynamic and thus will not go down the same path. Nonetheless, by learning more about Japan’s weaknesses, it is easier to see what might help for the UK economy. In the UK there is has been an escalation in immigration and rising retirement ages which has boosted the economy. This is not the case for Japan which has encountered a “slowdown as [the] working population growth went into reverse.”

Still, Philip Aldrick, Economics Editor at ‘The Daily Telegraph,’ points to the “eerie parallels” between the Japan, UK, economies. Statistically the facts speak for themselves. He says, “Japan’s economic problems are well-rehearsed. The world’s third largest economy has national debt of 236pc of GDP, and a budget deficit of 10pc. The UK, by comparison, is a bastion of fiscal rectitude, with national debt of 88pc and an 8pc budget deficit, using International Monetary Fund numbers.”

One of the biggest problems facing Japan’s economy right now is the unrealistic optimism of its experts. According to professor of comparative religion, Tetuso Yamaori, “the Japanese are optimistic. They believe the good times will come.” The UK on the other hand is more realistic, “get[ting] on top of its debts before they choke off not just the economy, but the hopes of a generation. Infrastructure spending is not the solution. Japan tried building its way to growth, but it just loaded up the debt burden.” Kohei Otuska, Democratic Party of Japan politician, argued, “the Japanese people…unless they experience a crisis, they don’t’ think they need to respond.”

Thus there are parallels between the economies of Japan and the UK. It is thus worthwhile to look at the positives and negatives on each and act accordingly.

Best Countries for Business

Japan Versus UK

In a recent report by Bloomberg, Japan was ranked higher than the UK vis-à-vis the regions that are best to do business with. In this report it escalated four places, stealing the third spot, with only America and Hong Kong ahead of it. For measuring purposes, the review utilized six criteria. Two of these were: the extent of economic integration; preparedness of the local consumer base.

Perhaps another reason for Japan’s escalation in this review has something to do with its 14 percent drop in the yen against the dollar over the last year. This has increased its competitiveness in the export market.

However, Japan’s trade deficit for last year was extremely high with a substantial decrease in exports to China and Europe. Its exports have been plummeting for the last seven months with a drop in shipments of almost 6 percent in December 2012. Some analysts believe the deficit may have reached its nadir, given the expectation of an improvement in exports over the next few months. Once that happens – along with the general upswing in the world economy – there is a strong likelihood that the country’s trade deficit will shrink alongside it. This does not mean it will go into surplus in 2013 but at least it will be going in the right direction. One also has to take into consideration the escalation in the price of oil import. As well, given that Europe is still trying to deal with its debt, the region is less interested in Japanese exports.

China, Japan and US Markets

It looks like China’s growth figures are going to be higher than anticipated. This is due to the expectation of Japan’s leading share index opening higher too. But the anticipated figures are very much dependent on the stability of the yen and on some raised worries that tensions could increase due to the launch of North Korea’s ballistic rocket. According to one strategist at Monex Inc., it looks like Japanese stocks will “chase the upside following the U.S. markets.” Immediately thereafter, America’s stocks netted a second day of solid gains.

Japanese Market

There are currently two principal issues with which the Japanese market needs to contend. First, fears of North Korea and second, the weakened dollar. These problems need to be sorted out if Japan has any hope that the west will take it seriously vis-à-vis investment-making and business development. The weak yen isn’t exactly helping the situation either; indeed, it’s definitely negatively impacting various Japanese ETFs.

Clearly though, unfortunately, the tsunami the country experienced last year is still being dealt with as well. Indeed, it’s not doing much for Japan’s economy, even today. So now the question being asked is if ETF investors will have a solid chance of making gains in Japanese equities. At least for this year though – as compared to figures in 2011 – Japanese equities are rebounding and the expansion of the Bank of Japan’s figure to $1.37 trillion has facilitated economic stabilization.

Conclusion

So ultimately it’s somewhat unrealistic to make sweeping statements about the Japanese economy and the benefits or disadvantages of making investments there today. It could just be a case of potential investors in general feeling better about taking risks and bringing their money to the east, simply because America’s economy is experiencing less flux and the Eurozone isn’t such a scary financial haunt anymore either. Or, it could be that there are good reasons for western investors to take their monies back to Japan – it really depends in great part on who one asks, and, at where the yen/dollar sits at that particular time.

Japan’s Yen Versus the Euro

For nearly a decade now, Japan’s Finance Minister, Jan Azumi has been warning that the yen’s escalation against the euro have happened rather too quickly. Europe has been battling to solve its debt crisis which has resulted in a 15 percent appreciation of the yen against the Euro during the last six months of 2011. This has continued into 2012 which has witnessed a further 2.4 percent yen increase.

Impact on Japan’s Economy

Unfortunately, it’s not just Europe that is suffering from the debt crisis. According to UBS foreign-currency strategist, Daisaku Ueno, it is negatively impacting Japan’s economy. He pointed out, “in

dollar/yen, companies are adjusting to yen strength. But as Japan exports more to the Eurozone than it imports from it, it is more difficult to adjust to euro weakness.”

However, this has not been affecting overseas investors. They are still purchasing Japan’s bonds which is thus elevating the appreciating pressure on the yen. As well, the currency was 2 percent stronger at the end of last week than the figure for October 31 – the most recent dollar/yen intervention.

America Taking Pride in Economy Again

The US has definitely had its issues with its economy in the last few years. But now it seems that things are looking up, especially when analyzing economic activity over the last year. The country’s S&P 500 Index is said to be doing better than its counterparts in Frankfurt, Hong Kong, Sao Paulo, Shanghai and Tokyo by at least 15 percent. As well, Dow industrials increased 135.63 points on housing and employment. In addition, figures for overall employment are good too with less Americans filing jobless claims.

The Only Way is Up

In truth, things were looking pretty dreary for the American economy a few years ago. It all started to go disastrously wrong in 2007 with the mortgage crisis. Thereafter, there was the plummet in stocks. This was followed by high levels of unemployment, and the collapse of the motor industry. Banks closed, and it seemed at one point that it was becoming almost impossible to hang on to any job. So, truthfully, the situation had no place else to go but up.

Asia Helping America

Today, in 2011-12, America’s economy is definitely going in the right direction. This is in spite of Europe’s debt crisis. Further, since there are now worries about inflation along with a drop in growth in Asia, this is positive for America’s economy too. Japan’s auto industry is suffering somewhat since until recently it was a world leader. This changed due to the overpriced Japanese Yen. But again, this is good news for America as Honda has decided to move four of its manufacturing units out of the country, to America and Mexico. And what this has translated to, is sales of Honda (in America) being just a tad behind those of Korean Hyundai vehicles. Great news for Americans working with Asians leading to the hope of more business deals ahead.

Japan Enters Europe

Panasonic Plans to Globalize Phones

Panasonic is planning on entering the European market with its smartphone in March 2012. As well, over the next four years, the company hopes to ensure 15 million units are ready for overseas sales, with Europe being the start of its entry into the world market.

Panasonic has made this decision on reflection of how the cellphone market is increasingly moving toward smartphone use globally. In this frame, it seems that expectations for growth overseas are quite substantial. Panasonic is not intending to miss out. In addition, the company has created a new smartphone business model and in the future will be expanding its offerings. The company hopes that its sales hit 1.5m in Europe in the next fiscal year and over the next four years for 15 million units to reach Europe, Asia and America.

In light of this goal, a few months ago, Panasonic established the Systems & Communications Company (SNC). Via this branch, the electronics firm will be able to fully expand its internal resources, such as the factory it has in Malaysia. At the moment, this is where the phones are made for the Japanese market, which will now be the primary manufacturer for Panasonic’s first global model.