Dangers in the rise
Japan’s GDP has picked up sharply this year, but the country has cautioned that the strong gains that investors have come to expect might not pan out for the next few years. Tokyo’s forecast estimates that Japan’s economy will pick up by just 1% in the 2014/2015 fiscal year, far below the 2.8% growth the government expects from the current year.
The IMF’s gotten in on the act, as well, with a new round of warnings to economists and investors. The agency has cautioned that Japan’s stimulus-fueled recovery could inflict severe damage to the global economic bounce back from the 2008 recession should prime minister Shinzo Abe’s measures fail. Like with China’s slowdown that has dominated headlines, an economic slump would hit Japanese firms, which are relying on strong growth, hard.
More importantly, if the yen fails to keep up its weakening against major currencies, particularly the dollar, Japan’s top exporters will face trouble. Firms like construction and manufacturing giant Komatsu Ltd (ADR) (OTCMKTS:KMTUY) are counting on the weak yen to boost its bottom lines from overseas sales. Komatsu Ltd (ADR) (OTCMKTS:KMTUY) rules the Chinese manufacturing market’s top spot, and although the Chinese market’s slowdown has hurt Komatsu Ltd (ADR) (OTCMKTS:KMTUY)’s outlook, a weak yen still makes the company’s forecast look optimistic. A failure on that end would be a big blow to both the company and investors looking to take advantage of Japan’s surge.
For now, however, the Japanese economy’s boost is lifting the results from the country’s top companies. Sony Corporation (ADR) (NYSE:SNE) reported earnings this week, and the firm finally brought its electronics division’s bottom line back to profitability in the most recent quarter. Sony Corporation (ADR) (NYSE:SNE)’s stock shot up sharply on the news that its electronics division, including sales from smartphones, televisions, and other products, did well. Sony Corporation (ADR) (NYSE:SNE)’s counting on those sales to help push into a growing future that capitalizes on the mobile revolution and other technological pushes. What happens to Sony Corporation (ADR) (NYSE:SNE)’s entertainment division now becomes the big news for investors: Many analysts have pushed for the firm to spin off the branch to unlock shareholder value, although others think the possibility is still remote.
Sony Corporation (ADR) (NYSE:SNE)’s rival in the gaming space, Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY), is an example of how weaker firms aren’t able to capitalize as successfully from the Japanese economy’s gains. Despite the weak yen, Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY)’s results have come in poorly, as the company has struggled to sell its next-gen Wii U game system. Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) still turned a profit for its most recent quarter — and shares are up more than 22% year to date – but this company’s heavily reliant on the weak currency to boost its struggling business. As Sony Corporation (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT) prepare to release next-generation game systems themselves this holiday season, Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) has to ramp up sales fast – or risk being left behind in the battle for next-gen preeminence.
The article Is Japan’s Surging Stock Market Hiding a Dangerous Risk? originally appeared on Fool.com and is written by Dan Carroll.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft.
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