Mired in deflation and stagnant for decades, Japan has long been the economic basket case of the developed world. Pundits are quick to point to the world's third-largest economy as a cautionary tale of how malaise can feed on itself and render moot most governmental efforts to restore growth.
Still, Tokyo's policymakers are perpetually tinkering in hopes of breaking the downward spiral. For example, their latest obsession has been trying to weaken the ascendant yen, which surged as unwelcome investors piled into the safe haven currency, thanks in part to Japan's deflationary conditions and wide current account surpluses.
But even as domestic conditions languish and policy maneuvers fail to make a dent, Japan is getting an unexpected boost from the roaring growth of emerging markets. And that boost underscores the increasing importance of poor, but fast-rising, emerging market countries as the developed world grapples with mountains of debt and unfavorable demographics.
Growth Comes to the Export Powerhouses
Japanese machine orders spiked 8.8% in July, trouncing the median 2% gain forecast by economists in a Bloomberg survey, after a sequential 1.6% rise in June. Strong overseas demand fueled the surge in orders as Japan's cash-rich corporations boosted capital expenditures.
Well-known bigger players like China, India and Brazil have tended to get all the attention because of the hefty returns their stock markets have chalked up over the last decade. But investors should note that a myriad of smaller economies around the globe have already dusted themselves off from the aftershocks of the financial crisis. Fragmented and often flying under the radar, the demand created by their growth adds up nevertheless.
Indeed, that demand helped propel other export powerhouses such as Germany to record growth rates in the second quarter, though mounting evidence suggests the most blistering growth may be in the past. And while speculation has been rife that German exports benefited at the expense of Japan due to the euro weakening as the yen rose, Japan's latest surge in machinery orders suggests there may be plenty to go around.
A Lesson for U.S. Policymakers
The rekindled success of export giants like Japan and Germany has lessons for American investors. U.S. companies with major overseas exposure may outperform their more domestically oriented peers.
And while high U.S. unemployment combined with consumers pairing down credit obligations tends to overshadow all economic discussion, countries can see their corporate sectors flourish even when domestic demand is weak.
Japan, for example, has seen incomes decline by a staggering 12% over the last decade amidst a deflationary spiral. But Japanese companies are rebounding dramatically thanks in part to overseas demand.
Japanese corporate profits climbed 83.4% in the second quarter after spiking 163.8% in the first quarter, while sales jumped 20.3% during the second quarter to post the biggest gain since 1980, Bloomberg noted. And that has had an impact on broader economic metrics like GDP, which expanded at a relatively robust 1.5% on an annualized basis during the last quarter. Economists had forecast a mere 0.4% gain.
Policymakers, meanwhile, should also note that reorienting the U.S. economy to take better advantage of naturally overseas growth may be a much better option that trying to prop up demand at home. Lately, panicked American investors have been piling into assets like U.S. government bonds in anticipation of Japanese style deflation. But it's far too early to be certain that the signs of a U.S. slowdown will turn into decades of stagnation.
And when it comes to boosting growth at home, exports can play a major role, as Germany and now Japan are proving.
Basics of Diversification
Learn one of the fundamental concepts of building a portfolio.View Course »